After you’ve taken your tax-free cash, any further withdrawals are subject to income tax at your marginal rate. This means that you will pay income tax based on the tax bracket you fall into. So, if you’re a basic rate 20% taxpayer, then this is what you will be taxed on your pension income.
Tax treatment depends on your individual circumstances and may be subject to change.
There are a few things you can be aware of to help you avoid a large tax bill.
Firstly, if you are taking an income from your pension while still working then both incomes will go towards your annual tax allowance. And exceeding this allowance will push you into a higher tax bracket, meaning that you will have to pay a higher rate of tax. So, it’s a good idea to keep an eye on your allowance and make sure any withdrawals you make from your pension fall below your remaining allowance amount.
The same thing applies if you are no longer working. If you take a lump sum from your pension that exceeds your annual tax allowance, then you will receive a large tax bill.
From the age of 55 you have a number of options when taking money from your pension. These include:
You can mix and match these options based on your needs and what suits you best. When accessing your pension, it’s important to remember that these savings are meant to last you throughout retirement. Releasing pension money early isn’t right for everyone as it will leave you worse off in retirement.
A financial adviser can check your pension for you and let you know how much your pension is worth. From here they can advise on the best options for accessing your pension in a way that suits your needs and circumstances. And when withdrawing money from your savings, they can help you do it in the right way to avoid a large tax bill.
We can help you make the best possible decisions when it comes to your pensions. We are authorised and regulated by the Financial Conduct Authority.