Tax in retirement

Ready to access your pension savings? Let’s make sure you don’t end up paying more tax than you need to.

We’ll help you understand the basics and show you how being tax smart could make your savings last longer.

The good news

From the age of 55 (may be subject to change) you are able to move your pot into flexible income, purchase a guaranteed income or take it as a lump sum and you can normally take up to 25% of the pot as a tax free lump sum. If you have taken flexible income, you can dip into your pension whenever you like. 

Any flexible income, guaranteed income or cash lump sum that you take is taxed as income at the time it is taken. It is added to any other income you have to calculate how much income tax you will pay. Remember that everyone has a personal tax allowance  (normally £11,850 for the tax year 2018/2019). You do not pay tax on income up to the value of your personal allowance.

Whatever age you are, you don’t pay National Insurance on pension income and once you reach state pension age you won’t have to pay National Insurance on any income.

When you die, any pot that remains can be passed on. Who receives it is at the discretion of Standard Life. You can let Standard Life know who you would like it to be paid to by completing an expression of wish form. As Standard Life decide who will receive the pot it is normally free of inheritance tax.

  • If you die before age 75, payments out will normally be free of income tax.
  • If you die after age 75, payments out will normally be charged income tax at the beneficiary's marginal rate.

The not so good news

Any income you receive above your personal tax allowance is taxable. This includes pension income.

Under Government rules, when you start taking flexible income withdrawals, this will restrict the future payments you or an employer can make to any of your money purchase pensions without potential tax consequences. Your annual allowance becomes £4,000 in total across all money purchase arrangements. This pension plan is an example of a money purchase arrangement. This restriction will not apply if you are only accessing your tax free cash entitlement.

When you flexibly access your benefits, you will get a notification from your pension provider which will explain more about the new limit and what you need to do.

It's important to note that this reduced annual allowance only applies to money purchase pensions (also known as defined contribution pensions), the overall annual allowance remains £40,000 across all types of pension.

Find out more (PDF, 190KB)

Some handy tips to reduce your tax bill

Here are a few tips that may help you reduce the amount of tax you pay.

1. Top up your pension or make a donation to charity

If you're still working then making payments into a pension scheme using salary exchange could reduce your total taxable income. Salary exchange won't be right or available for everyone. Investments can go down as well as up, and you may get back less than was paid in.

Donate to charity under Gift Aid and reduce your total taxable income.

2. Switch to tax-free savings

If you have money in a standard savings account, you could transfer it into an ISA (subject to limits).

3. Transfer assets to your partner

If your spouse is a non-taxpayer or pays a lower rate of tax than you then you could transfer income-producing assets such as savings or equities into their name. This could help if you’re a higher rate taxpayer and they’re not. You may need to seek specific financial advice if you are considering this option. There’s likely to be a cost for this.

4. Reduce your flexible income

If you’re taking a flexible income and you're going to exceed your personal tax allowance for the year then you could think about how much you’re taking from your pension each year. For example, you could reduce your income by deferring some income until the next tax year - but remember investment risk still applies to your pension.

It’s important to note that guaranteed income (annuity) payments can’t normally be reduced.

These tips should not be regarded as financial advice. The right approach for you will depend on your individual circumstances.

This information is based on our understanding of taxation legislation and regulations in April 2018. The legislation and regulations can change. Your own circumstances also have an impact on tax treatment.

For more information on the allowances, download Information about tax relief, limits and your pension (PDF, 190KB).

Access to impartial guidance

We recommend you seek appropriate guidance or advice to understand your options at retirement. You can get free guidance over the phone or face to face with Pensionwise.

Go to www.pensionwise.gov.uk or call 0800 138 3944.

The Money Advice Service (MAS) guide is also available on the Pensionwise site.