1. What’s taxed and what’s tax-free
Taxed pension income
When you get a pension you pay tax on any income above your tax-free Personal Allowance .
How much Income Tax you pay depends on the tax rate that applies to you.
Your income includes:
- the State Pension
- private pensions (workplace, personal, stakeholder)
- earnings from employment or self employment
- any taxable benefits you might get
- any other income, money from investments, property, savings
When you start getting your regular pension payments, eg from an annuity, you’ll have to pay Income Tax on them.
Your pension pot is ?60,000, you could take ?15,000 without paying Income Tax on it. You then get regular payments from the remaining ?45,000. These payments would be taxed.
Taking smaller pension funds as lump sums
You can take your entire smaller pension fund as a lump sum. 25% of it is tax-free.
You can usually do this if you’re taking:
- a lump sum worth up to ?30,000 from one or more pension pots (sometimes called a ‘trivial commutation’)
- smaller pots worth up to ?10,000 each from workplace pensions
- up to 3 smaller pots worth up to ?10,000 each from personal or stakeholder pensions
However, if you’ve already started drawing a pension from the fund and then decide to take a lump sum, you would be charged 20% tax on the entire amount.
At the end of the tax year you might get a refund or have to pay more tax on the lump sum. This depends on your overall income for the tax year.
Tax-free allowances if you were born before 6 April 1948
If you or your spouse or partner were born before 6 April 1935 you might also be able to get Married Couple’s Allowance or Maintenance payments relief for payments to ex-spouses or partners.