Here’s an interesting fact:
If you’re 55, you can withdraw from your pension. 25% of your pension savings won’t be taxed, but 75% will be income taxed. The taxation depends on your yearly income as well as your current tax rate.
Pension Drawdown: Using Your Pension Pot for a Flexible Retirement Income
Pension Drawdown is a form of retirement income in which you withdraw your pension pot, normally from age 55 onwards. Withdrawing money means that it’s not there to provide for the same level of pensions payments when you eventually retire or pass away.
So while this can be an attractive option for some people, it should always be considered carefully and based on how much cashflow pressure they are under at the time.
Calculating Pension Drawdown Tax using Pension Drawdown Calculator
To calculate your tax bill, enter the monthly income you’d like to withdraw from your pension pot as well as the annual investment growth on that amount.
For example if you want £1000 per month and you get a return of at least 0.25% then input 1000*0.01/12=£6600
Alternatively, for an illustration without going into calculations just click ‘show me my annual taxes’
This will show what percentage of your total retirement fund is being withdrawn in order to calculate any potential taxation liability due when it comes time to pay National Insurance contributions or Income Tax each year. It also shows how much money may be available for other things such as spending or saving while still meeting your chosen monthly income.
Get Help with Pension Drawdown Tax Through Pension Wise
Pension Wise is a free service that has been set up by the UK government following reforms made last year, which means anyone aged 55 and over now has access to specialist advice from an independent organisation without having to pay anything at all.
Pension Wise advisors have experience of working with clients who may be struggling with health conditions or mental health issues alongside advising people about complex retirement arrangements.
Things to Consider With Pension Drawdown
When you take your pension, the money is taxed as part of your income and any lump sum may be subject to inheritance tax.
You also need to manage what happens when you die with regards to taxes – but a will can help avoid these potential problems.
Some Drawdown Tax Rules
Taking the first 25% of your pension funds, or it can also be less than 25%, is a straightforward process. As if that’s not enough, your withdrawn funds won’t be taxed! Even if you are:
- Withdrawing your funds in smaller bits and pieces.
- Withdrawing everything in your pension.
- Earning a stable income (also known as an annuity).
- Choosing to earn an adjustable income with drawdown1.
Tax is charged when you withdraw an amount over 25%. If this is the case for you, you will be paying tax on all of your annual income. What does this mean for you? And how can you calculate that? In this instance, you’ll be pushed into a higher tax bracket when you withdraw large amounts of money from your savings.
Think about it:
It might be in your best interest to check your current tax rates on your income and personal allowances. The gov.uk website will be a good source of information for you as well. If you have all of this information in mind, you’ll be in the know when withdrawing more than 25% of your pension. And another thing, if you withdraw your funds in sections spread across some time, you might pay less tax! You’ll be in a lower tax bracket.
How Does Paying Tax Work?
Tax will be deducted before any withdrawal is paid under PAYE2(pay as you earn). This responsibility falls on your pension provider. The first time that you’ll be taxed, an emergency tax code will most likely be used, or a tax code that your P45 documents. Below is a table stipulating how emergency tax impacts withdrawals from your pension:
|Single withdrawal of||Tax deducted||Payment to you|
How Does Pension Drawdown Work UK?
If you live in the UK and you want to claim or cash in your pension via drawdown, you’ll be liable for income tax if your payment exceeds your allowance, that is, your income tax allowance. Your pension provider taxes any drawdown income from your pension. This goes according to the PAYE system in the UK.
Is A Drawdown Pension A Good Idea?
A drawdown pension can be a good idea for you if you want your investment to grow, but still, be able to withdraw funds when you need to. Because you’ll be able to keep an amount of money invested, but at the same time get a monthly income as you need to or want to.
How Does A Drawdown Pension Work?
Simply put, a pension drawdown is a way to go when you want your investment to grow, but still, have access to the funds within your pension savings. You can gain access to your pension funds and receive small amounts at different times as an income, while still having your money invested. You’ll be able to withdraw money from your drawdown pension, but you’ll be charged with income tax according to you allowance.
How Can I Avoid Paying Tax on My Pension Drawdown?
Tax relief on pension drawdowns is calculated as 20%, meaning a person needs to withdraw at least £30,000 before any tax can be levied. Those aged 55-59 will still have the full 25% taxed deducted from their income if they take less than 30%.
Before We Say Goodbye For Now, Here’s A Few Extra Things You’ll Need To Know About:
Keep this in mind:
Taxable Income, Defined Benefit, Social Security, Long Capital Gains, Pension Fund, and Tax Brackets.
Firstly, you probably know that your income from your pension will be taxed at the normal tax rate if you withdraw or request that income. Secondly, a Defined Benefit (DB) pension plan is a pension plan where your employer gives you a specified pension payment, lump sum, or a combination of those two options. The payment depends on your earnings during your working history, tenure of service and age, etc.
Thirdly, Long Capital Gains are deducting your tax-free allowance from your total taxable gains. If you add this to your taxable monthly income. If this amount is within your basic Income Tax level, you’ll need to pay 10% on your gains (or 18% on your residential property). You’ll also pay 20% (or 28% on your residential property) on any amount which is over and above the basic tax rate.
Fourthly, you need to know what a pension fund is if you’re considering taking one out. In the UK there are private pension schemes that you or your workplace invests for you to save money for the future. You can choose between the 2 main types: defined contribution (depends on what you pay into it) and defined benefit (based on your income). Lastly, let’s look at tax brackets. They determine what amount of tax you’ll be asked to pay. See the table below:
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,500||0%|
|Basic rate||£12,501 to £50,000||20%|
|Higher rate||£50,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
It is possible to have your pension savings or investment growth, all the while having access to your funds from the age of 55!