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.
Tax-free pension income
Most pension schemes let you take 25% of your pension pot as a lump sum. This money is tax-free.
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 a smaller pension fund as lump sum. 25% of it is tax-free.
You can usually qualify to 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
You get a higher Personal Allowance.