Is your retirement income taxable? Tax rules explained | Personal Finance | Finance –

Published On: Sun, Aug 29th, 2021

Is your retirement income taxable? Tax rules explained | Personal Finance | Finance


As money received from pensions is classed as income, it is subject to taxation as if it were regular income.

At this point, the higher rate kicks in and people face a 40 percent tax rate.

State pension

It should also be noted that income from the state pension is counted as regular income, although the current annual income drawn from a full state pension is around £9,340, so falls below the threshold for taxation.

This means that is someone’s only source of income is the state pension, they won’t have to worry about taxes, but if other pension income takes total receipts above the thresholds, they will do.

Private pension

It isn’t all doom and gloom, however, as there are strategies people can employ to keep the taxman’s hands off their money.

If someone, like most people, has a Defined Contribution scheme, they will be able to withdraw a quarter of their pension pot as a tax-free lump sum.

Some pension schemes even have rules which may allow people to withdraw more than a quarter of their pension pot as a tax-free lump sum.

There are extreme scenarios when people may be able to take all the money in their pension as a tax-free lump sum.

This will be the case if they are under 75, are expected to live less than a year because of severe illness and pension savings don’t exceed £2,073,000.

All of these criteria must apply for this to be the case.



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