How your pension savings are taxed

You can take 25% of your pension savings tax free – and the government will take their bite out of the other 75%

It’s important to understand the tax implications of taking your pension savings. But tax can be complicated.

So here's an overview from us, plus some helpful links to the government website where you can find out more.

How much tax will I pay when I take my pension savings?

Each time you take a pension pot, 25% of it is tax free.

You’re taxed on the rest (75%) as you would be with other earned income, like a salary. (But you don’t pay national insurance on it.)

Please note – for most people, 25% of your pension pot is tax free. In a few cases, you might get more than 25% tax free if you’re eligible for protected tax-free cash – but it’s quite uncommon. If this is the case for you, we’ll let you know when you take money from your pension pot with us. You can find out more about this on our help and support pages »

What tax rate applies?

Payments from the other 75% of your pension pot are classed as ‘earned income’ for tax purposes – which means you’re taxed at the highest rate of tax you pay.

How is my tax calculated?

Your tax is calculated on a yearly basis, so it depends on how much income you’ve received in that tax year. (The tax year runs from 6 April to 5 April.)

So whether you’re taking your pension:

  • all in one go
  • a bit at a time, or
  • as a guaranteed income…

…it’s important to consider whether adding the payment(s) to your other income could push you into a higher tax band for that tax year (meaning that you could pay more tax than usual).

 

Find out more about income tax rates and allowances on the government’s website »

!Watch out for emergency tax and basic-rate tax

Emergency tax – what’s emergency tax?

When you start taking money out of your pension pot, with some of your options, it’s likely that you’ll be allocated an emergency tax code to begin with.

So the lump sum(s) you take may be taxed using an emergency rate until HM Revenue & Customs (HMRC) have given your tax code to your pension provider. This can sometimes happen again in future tax years.

So you may pay too much tax at times – but if you do, you’ll be able to claim a tax refund from HMRC.

Basic-rate tax

Or if you choose to take a pension pot of £10,000 or less all in one go (as a small pot lump sum), your pension provider will normally deduct basic-rate tax. Basic rate tax is currently set at 20%.

So if you pay a different rate of tax, you’ll either be due a refund from HMRC or you may need to pay further tax.

 

Go to the government’s website to find out how to claim a tax refund from HMRC »

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Where to get guidance and advice

Retirement planning = big decisions

Find out where to get help (our website, Pension Wise or LV= to name but a few).

Explore your guidance and advice options »