How Much Tax Will I Pay on Pension Income?

Income from a pension is taxed as earned income. This will, therefore, depend on the amount of other income you are receiving and the amount that you cash in from your pension. Everyone’s circumstances are unique so you will need to seek the support of a financial planner to find out how much tax you will specifically pay and the strategies that could be implemented to ensure you only pay what you need to.

The amount of tax you’ll pay depends on several factors:

• The size of your pension
• Your other income
• The timing of your withdrawals.

Here’s a breakdown to help you understand the potential tax liabilities:

1. Tax-Free Lump Sum: You can withdraw a certain percentage of your pension pot as a tax-free lump sum. The maximum tax-free amount changes and it is important you get advice on what that is.

2. Taxable Income: The remaining money in your pension pot is considered taxable income. When you withdraw these funds, they are added to your income for the tax year, which could push you into a higher tax bracket.

Important Considerations:

• Emergency Tax Codes: When you withdraw a large sum, your pension provider may apply an emergency tax code, leading to an initial overpayment of tax. If this applies to you, you may be able to claim a refund from HM Revenue & Customs (HMRC) if this occurs.
• Impact on Benefits: Large withdrawals can affect entitlement to means-tested benefits.
• Alternative Options: Instead of cashing in your entire pension pot, consider options like income drawdown or purchasing an annuity, which may offer more tax-efficient income over time.

Recommendation: Before making any decisions, it’s advisable to consult with a financial adviser or tax professional to understand the full tax implications and explore the most suitable options for your circumstances.

The value of pensions can fall as well as rise, you may get back less than you invested.

Tax treatment varies according to individual circumstance and is subject to change.