I am 56 years old. Last year, I claimed a quarter of my pension as a lump sum and now also get a monthly income from my pension, which I set aside in a separate bank account. Am I entitled to claim any tax refunds on this set up?
When you can start drawing benefits from your pension scheme, you may be able to take part or all of your pension benefits as a 25% tax-free cash lump sum. You have done this and are now drawing an income on the remainder of your pension pot.
Pension income paid to you is normally treated as earned income for tax purposes, although you don’t pay any national insurance contributions on your pension income. Any withdrawals you make from your pension after you’ve taken your 25% tax-free lump sum will be included in your annual earnings for income tax purposes.
As such, you will have to pay at least some tax if you take home more than £11,500 within a financial year. Bear in mind that your state pension and any income from part-time work or buy to let will also be included in your annual earnings calculations.
There is no tax relief, therefore, for taking your pension income and holding it in a bank account. What you could do, though, is draw an income from your pension so that your total taxable income is no more than the personal allowance and hold that in your bank account. Any amount over that will be subject to income tax, however.
David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy.