When taking a combination of tax-free and taxable money from your pension, usually up to 25% will be tax-free and the rest is subject to income tax. You can take money out this way as single amounts whenever you want and/or as a regular income, but every time you take money it will always include a tax-free and taxable amount.
Benefits
- You have the flexibility to decide how and when to take your money, either in one go or as multiple lump sums.
- Taking your money in one go will give you a lump sum right away and you can do what you want with it. Or you can dip into your pension pot as and when you need to.
- You have an element of control over the amount of tax you pay. For example, you could withdraw just enough each year to keep you within the basic rate tax bracket.
- Any money left in your pension when you die can be passed on to your loved ones.
- Any money in your pension remains invested meaning it can benefit from potential growth. Although, please remember your money could go down in value as well as up and you may not get back what you put in.
Considerations
- Once any money has been paid, you can't change your mind.
- At least 75% of each payment will be subject to income tax, which means it could put you in a higher tax bracket. For example, withdrawing money from a pension could turn a basic rate tax payer into a higher rate tax payer. This is because the withdrawal is added to any other income you may gain in that tax year, such as a salary, state pension or any other pension income.
- Taking money out of your pension, will leave you with less money in the future and there's a risk you could run out. You need to make sure your money will last for as you as you want it to or you'll have to rely on another source of income in retirement. Withdrawing too much, poor fund performance, charges and inflation could all have an impact on how long it lasts.
Please note: not all these options may be available with your current plan. You may need to transfer to another product or provider and product restrictions including minimum investment may apply.
Tax rules can change and the impact of taxation and any tax relief depends on your circumstances, including where you live.
By taking cash lump sums you could lose some or all of your state benefits.
You will need to keep an eye on any money in your pension that you keep invested and review the funds you invest in.
Do you have a smaller pension pot?
There are different rules if your pension pot is less than £10,000. For the most up to date information on "small pots" please speak to your adviser or visit www.gov.uk.
An example of the tax you could pay by taking a combination of tax-free and taxable money from your pension
Sally is 60 and still works part-time. She's not old enough to receive her state pension, but would like to access her pension pot to fund some urgent house repairs and a holiday with her husband to celebrate her 60th birthday. They have decided that £8,500 will cover their costs.
She has £50,000 in her pension pot. There are a number of ways to access the cash in her pension but Sally decides she wants to take the money as a cash lump sum for the holiday;
Sally withdraws £10,650 from her pension pot
The first 25% is tax-free, which is £2,662
The other £7,988 is added to any other income Sally has in this tax year and taxed accordingly. In this example she pays tax at 20%, so she pays £1,500 in tax (£7,500 x 20%). However, she could have paid more tax as it could have moved her into a higher tax bracket and HMRC require us to deduct tax using emergency tax although she may be able to reclaim that. Tax depends on your circumstances and where you live.
Total received by Sally is £8,500
This is just an example and shouldn't be taken as a recommendation.
How long your money could last
This planner shows you how taking different amounts of money from your pot can impact how long your money might last. You can input different amounts and see the impact it has.
How tax could affect your income
This calculator will provide an estimate of how much Income Tax you may pay, depending on how much money you take from your pension. You can input different amounts in the box that asks for your gross salary and see roughly how much tax you might have to pay.
How much Emergency Tax you might pay
This tool is to show you how much Emergency Tax you might have to pay on withdrawals from your pension pot.
Important Q&As
Subject to the rules of your Plan/Scheme, yes, you normally can - but remember to consider how you will fund your retirement and how much tax you may have to pay.
Yes, you can keep adding to your pension even if you've withdrawn from it. However, the amount that you can add and benefit from tax relief is reduced. This is called the Money Purchase Annual Allowance. Please speak to an adviser or visit HMRC if you think this affects you.
No, you have the flexibility to take out money how and when you need it. You don’t have to take all of your money at once, and if you take single amounts you can control how much tax you pay by spreading the amount over a number of years.
Yes, but remember interest rates in banks and building societies can be low, and there could be associated charges. Leaving money in your pension pot may be more tax-efficient and has the potential to grow, though as with all investments, your money could go down as well as up, so you might get back less than you put in.
Other pension options
Take tax-free money from your pension
(also known as "Flexible cash and income or Drawdown")
Need more help?
We know there’s a lot to consider when planning for retirement, and it can be tricky to know where to start. To help you understand all your retirement options, we recommend speaking to your adviser or getting guidance.
Find a financial adviser
Find an independent financial adviser in your area to help you in your future pension planning.
Visit
www.unbiased.co.uk
and enter your postcode.
Pension Wise
Pension Wise is a free and impartial guidance service offered by the Government. They can’t make recommendations or tell you how to invest your money, but will provide information on a range of available pension options.
Visit
moneyhelper.org.uk/pensionwise or call 0800 280 8880 to book a phone or face-to-face appointment.
HMRC
Visit
hmrc.gov.uk to find out more information on tax rules and legislation which may affect you and your pension plans.
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