Most Brits look forward to retirement and to receiving a pension they have worked hard to build up during their working lives. How much tax your pay on your pension and throughout your entire retirement varies depending on how you decide to receive your pension. Pension withdrawals can be expensive, so how can you avoid paying too much tax?
All Brits are entitled to a state pension when they reach the age of 66.
You will either receive the “basic state pension” which is currently set at a maximum of £137.60 a week, or the new state pension, the full amount that can be claimed is £179.60 a week.
Certain eligibility criteria must be met to draw these pensions, and the actual amount you get will likely depend on your national insurance record and how much you have paid in tax over the year.
But, in a nutshell, most people if they have worked throughout their lives will be eligible to receive one of these state pensions.
So how will your pension be taxed?
You won’t be taxed if your total annual income adds up to less than your “personal allowance.”
This “personal allowance” is set by the government, it currently stands at £12,570.
This means that you will not be taxed on the first £12,570 of your pension.
This often means that your state pension will not be taxable, but, if you have built a pension pot and decide to draw money out of it you may be taxed on this.
If you draw additional money from your pension pot you will be taxed at a basic rate of 20 percent for any additional income over the “personal allowance” of £12, 571.
So, if you decide to draw an additional £10,000 a year from your pension pot on top of your £12,570 tax-free personal allowance, you will have to pay the basic rate of tax, meaning 20 percent of the £10,000 will be taken by the taxman.
The tax rates increase the more you draw, the basic rate will tax any income between £12,571 to £50,270 at 20 percent, after this any income received between £50,271 and £150,000 will be taxed at 40 percent, while there is an additional 45 percent rate of tax for any income over £145,000.
So, it’s really important to work out how much you intend to withdraw from your pension pot every tax year to avoid paying higher levels of tax.
Additionally, to the government’s taxes, your pension provider might charge you for withdrawals
Normally the first 25 percent of each cash withdrawal will be tax-free.
But, the rest will be added to your other income and is taxable.
You might also be charged when you make a cash withdrawal and there could be limits on how many withdrawals you can make each year, so it is worth double-checking the specific restrictions surrounding your pension.