Do You Pay Tax on a Pension Withdrawal?

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17 Jul 2018

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Yes, you do pay tax on pension withdrawal. The Government's website states: "When you take money from your pension pot, 25% is tax-free. You pay Income Tax on the other 75%."

What Are My Options for Managing the 25/75% Split On My Pension Withdrawal?

There are multiple options regarding how you withdraw from your pension pot. Here are the most common:

Pension Drawdown

A pension drawdown scheme invests your pension savings when you reach retirement. This means that the value of your pension pot fluctuates. However, this plan allows you to withdraw the first 25% of your pot tax-free, and you may withdraw it however and whenever you like. This means, if you want to withdraw your first 25% as a massive lump sum, you can. Or, if you want to take your first 25% in a series of small, regular payments, you can. The pension drawdown scheme is certainly the most flexible scheme available. And although pension drawdown tax is the same percentage as other schemes, you have a degree of control over when and how often you pay the tax. To work out how much tax you'd pay under this scheme, see Retirement Advantage's Pension Drawdown Tax Calculator. If you want:

  • Flexibility to take out money when you want.
  • To continue to invest your money.
  • Not to be restricted to receiving set sums of money each year.
  • Greater control over your tax on a pension withdrawal.

Then a pension drawdown is right for you.

Annuity

You could set up a guaranteed income, which you might already know as an annuity. It'll give you a standard rate of income for the rest of your life. You normally receive your quote as a percentage. If you agree to a quote, it's irreversible. So, be careful when making your choice. This method grants you 25% of your pension pot tax-free, prior to purchasing the annuity. But, you will have to pay tax and national insurance on your regular income once the annuity begins. If you want:

  • A guaranteed income.
  • Stable income that stock market fluctuations won't affect.
  • A higher income due to you suffering from poor health.
  • And an income that rises with inflation.

Then an annuity is right for you.

Expert Support

If you're struggling with pension schemes for your employees, or any other pay and benefits issues, contact Croner's experts on 0808 145 3378.

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