Tax and your retirement

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 Normally 25% of your pension savings can be withdrawn tax-free.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.

For example

Taking a lump sum (These figures assumed a confirmed tax code is being used and not an emergency tax code)

Lump sum 25% tax-free Taxed amount Personal allowance 2015/16 Tax rates Total tax bill
£20,000 £5,000 £15,000 £10,600 20% x £4,400 £880
£40,000 £10,000 £30,000 £10,600 20% x £19,400 £3,880
£100,000 £25,000 £75,000 £10,600 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)

Total pension 25% tax-free Amount left to provide an income Chosen annual income Tax paid Income after tax
£100,000 £25,000 £75,000 £3,000 @ 20% = £600 £2,400
£200,000 £50,000 £150,000 £6,000 @ 20% =  £1,200 £4,800

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.

Annual Allowance

  •  The amount of money you can save into your pension each year while still receiving tax relief.
  • For the 2016/17 tax year the Annual Allowance is £40,000 or 100% of your salary if that is less.
  • The allowance will be reduced by £1 for each £2 of income between £150,000 and £210,000. The minimum allowance for those earning £210,000 or more will be £10,000.
  • If you exceed this limit you won’t receive any tax relief on the amount over the limit, and you may be liable to an annual allowance tax charge.
  • If you are not earning enough to pay income tax, you can still receive tax relief on pension contributions up to a maximum of £3,600 a year.


Money Purchase Annual Allowance

  •  The Annual Allowance is decreased when you start to take flexible income from your pension; this is known as the Money Purchase Annual Allowance.
  • This is the amount of money you can save in to defined contribution pensions, across all the schemes you belong to, and receive tax relief on.
  • For the 2016/17 tax year the Money Purchase Annual Allowance is £10,000.
  • If you exceed this limit you won’t receive any tax relief on the amount over the limit, and you will be liable to a tax charge.


Lifetime Allowance

  • A limit on the amount of pension benefit that can be drawn from pension schemes, whether as lump sums or retirement income, and can be paid without triggering an extra tax charge.
  • For the 2017/18 tax year the Lifetime Allowance is £1 million.
  • You may incur a charge when you go over this limit if you have not protected your savings. If you think you may breach this limit, we recommend you take financial advice.



LF Money Markets Pension Fund – change of underlying investment fund and fund name

Posted 10 Jan 2019 | LFS News

The underlying investment fund into which the fund invests, the Janus Henderson Money Market Unit Trust, is closing and will be replaced by the LGIM Sterling Liquidity Plus Fund (which is managed by Legal and General Investment Management Limited). In addition, the LF Money Markets Pension Fund will be renamed “LF Cash Pension Fund”.

LF Cash Personal Pension Plan change of underlying investment fund

Posted 11 Jan 2019 | LFS News

The underlying investment fund into which the fund invests is the Janus Henderson Money Market Unit Trust. This Fund is closing on 14th January. The LGIM Sterling Lquidity Plus Fund has been identified as a replacement. This is managed by Legal and General Investment Managers Limited

JFM acquired by Capita

Posted 19 Oct 2015 | JFM News

The business process management firm Capita has acquired Vertex Mortgage Services, which includes Jessop Fund Managers (JFM), for £35 million.

‘Advisers must manage client expectations post-April’: JFM

Posted 26 Feb 2015 | Industry

The impending pension changes could raise client expectations beyond realistic levels, David Hughes, managing director of JFM, has warned. Mr Hughes, managing director of the pension investment management firm, said the reforms, which come into force on 6 April, could create fresh challenges for advisers because of client attitudes.

What does 2015 hold for advisers and the pensions market?

Posted 19 Dec 2014 | Insight

As we move into an era of greater pension freedom, the general public will have more choice and control over how they access the money they have saved for retirement. It will become more important than ever for advisers to help their clients to understand the risks associated with depleting their retirement savings too soon.

Time to prepare for ‘pension freedom’

Posted 07 Nov 2014 | Insight

I have believed for some time that greater flexibility and simplicity are needed in the pensions market. The government’s changes are certainly a step in the right direction. Savers should have the freedom to choose how to access their money.

Low-cost launch to exploit capped drawdown carve-out

Posted 07 Oct 2014 | Industry

A specialist pension asset manager has become the latest to set to exploit a carve-out in the new pensions freedoms that will allow retirees to maintain an annual allowance four times higher than under new drawdown rules if they are already in ‘capped’ drawdown prior to next April.