In simple terms, you don’t pay tax when you’re saving into your pension, but you do pay tax when you take your pension.
When you are saving into your pension, the government adds the tax you normally would have paid in income tax, in to your pension. So, as a 20% taxpayer, if you were to invest £100, tax relief would be added of £25 which is 20% of the gross contribution.
When you come to draw money out of your retirement savings, the government tax some of this money as if it were income. Normally 25% of your pension savings can be withdrawn tax-free. The remaining 75% will be taxed as income.
Taking a lump sum (These figures assumed a confirmed tax code is being used and not an emergency tax code)
||Personal allowance 2015/16
||Total tax bill
||20% x £4,400
||20% x £19,400
||20% x £31,785
40% x £32,615
Taking an income (These figures assumed a confirmed tax code and the tax-free personal allowance is already used)
||Amount left to provide an income
||Chosen annual income
||Income after tax
||@ 20% = £600
||@ 20% = £1,200
The information in the two tables above is based on our understanding of current law and practice. Tax law and practice may change in the future. These figures do not take into account any other taxable income you may receive or additional taxable income that may move you into a higher tax bracket. These figures are for illustrative purposes only. The amount of tax you pay will depend on your personal circumstances.
Pass on your pension tax-free
If you die before the age of 75, your beneficiaries can take whatever remains of your pension savings as a tax-free lump sum, or take a tax-free income either through an income drawdown plan or an annuity.
If you die after your reach 75, your beneficiaries will have to pay tax on any money that’s passed on. If they take the money as a lump sum it will be taxed at their marginal rate of income tax.