Tax payable on pension drawdown.

HH190723

Hello,

Due to a change in my health circumstances I'm planning to retire earlier than I had hoped.
I'm currently 62 years old and need to drawdown on my pension. I'm currently working full time so understand that if I drawdown on my pension now 25% will be tax free and 75% will be taxable.
But if I was to retire from work & later drawdown on my pension, would I still pay tax? 

Many thanks

DE_612183

I think it depends on when you retire - if you retired on 31/3/24 and then drew down in the next tax year, your personal allownace would be offset against the drawdown - so 12700ish tax free

molerat

The 75% is taxable in the same way as every penny of your pay is taxable but you have a personal allowance to set against any income. That 75% is income the same as any other, just because it is "taxable" does not necessarily mean you will pay any tax.

Dazed_and_C0nfused

HH190723 said:

Hello,

Due to a change in my health circumstances I'm planning to retire earlier than I had hoped.
I'm currently 62 years old and need to drawdown on my pension. I'm currently working full time so understand that if I drawdown on my pension now 25% will be tax free and 75% will be taxable.
But if I was to retire from work & later drawdown on my pension, would I still pay tax? 

Many thanks

Retiring from work wouldn't change anything. 

Any pension income is still taxable (the 25% TFLS excepted) so if you had taxable pension income of say £15k and no earnings you would still have tax to pay.

jlfrs01

As I understand it, yes. Pensions are taxable, even the state-earned ones but it's crucial to understand when to take it.

I've recently drawn my tax-free 25% out of a SIPP but as a higher rate tax payer, if I take any more then it'll be taxed to the tune of about 40%. Therefore I'm going to leave it until I retire proper so I'll only pay the basic rate tax band. 

I presume yours is a personal pension of some sort and not a company one because company pensions seldom allow drawdowns and can have different ages for when they are accessible by current or former employees.

VXman

After the 25% tax free amount any pension is taxable. It is classed as an income in the same way that paid employment is. You still get your £12700 tax free personal allowance so it is only the amount over £12700 that will be taxed at 20% or at 40% for any income (pension, employment, other earnings combined)  over £49700.

by the way - usually you have the option to take all 25% in your pot in one big lump sum and then all drawdowns after that are taxable rather than 75/25 split every time you drawdown.

Pat38493

HH190723 said:

Hello,

Due to a change in my health circumstances I'm planning to retire earlier than I had hoped.
I'm currently 62 years old and need to drawdown on my pension. I'm currently working full time so understand that if I drawdown on my pension now 25% will be tax free and 75% will be taxable.
But if I was to retire from work & later drawdown on my pension, would I still pay tax? 

Many thanks

To add one point to the other answers, if you are using a drawdown approach, you usually also have the option to take out 25% of your pension pot completely tax free even in the year you are still working.  Alternatively you can take out what are called UFPLS withdrawals which means you take chunks, and each of the chunks is 25% fax free and 75% taxable at your current marginal rate.  

If you do the former, it means that the remaining 75% will be fully taxable whenever you decide to take it out later on.

As others have explained, your current marginal rate might well be higher if you are also still working, so after you've retired you will very likely pay less tax on the same withdrawal, but to get better comments you'd need to post the amounts involved. 

Albermarle

jlfrs01 said:

As I understand it, yes. Pensions are taxable, even the state-earned ones but it's crucial to understand when to take it.

I've recently drawn my tax-free 25% out of a SIPP but as a higher rate tax payer, if I take any more then it'll be taxed to the tune of about 40%. Therefore I'm going to leave it until I retire proper so I'll only pay the basic rate tax band. 

I presume yours is a personal pension of some sort and not a company one because company pensions seldom allow drawdowns and can have different ages for when they are accessible by current or former employees.

You seem to be referring to company defined benefit/final salary schemes.

Most active private sector workplace pensions are nowadays Defined Contribution schemes, and the rules about drawdown etc are the same as with personal pensions. So normally you can do what you want with them within the rules. There might be some restriction on taking money out whilst contributions are being paid in, but normally not and in any case the OP is retiring.

Greg_J

Just as a heads up, the current Tax free allowance is £12570 and the 40% threshold is £50,270.  Any drawdown from a pension pot of over 30k will have to be done by a financial adviser ( legal requirement) and fees will be incurred alongside any taxes due. 

HH190723

Thanks everybody. Really appreciated.

MallyGirl

Greg_J said:

Just as a heads up, the current Tax free allowance is £12570 and the 40% threshold is £50,270.  Any drawdown from a pension pot of over 30k will have to be done by a financial adviser ( legal requirement) and fees will be incurred alongside any taxes due. 

That is not true. You might need to tick a load of boxes but you can just crystallise and draw down from most modern pensions without needing an advisor. The £30k figure is usually connected to wanting to transfer out of a DB pension and needing advice (and a positive recommendation) to be able to do it.