I’m 65 and employed. If I draw on my pension I must pay 40% tax. Why?

22 August 2018

Q

Can you explain why we are told we get tax relief on pensions? I have just reached 65 and have a pension pot worth £100,000. But if I want to take some of it out, I will have to pay income tax at 40% as I am still employed. Where is the relief?

From
AJ/Bournemouth

A

You will have received tax relief on the contributions made to your pension pot over the years, and in addition to this, under the pension freedom rules that were introduced in April 2015, you are able to withdraw up to 25% of your pension pot tax-free.

As you receive tax relief when money goes into your pension, you are taxed on what comes out beyond that initial 25%. This is taxed as income and you pay your marginal income-tax rate on it – in your case 40% as you are a higher-rate taxpayer.

Your situation – where you have access to a pension pot but are still working – is becoming increasingly common, as more people are choosing to continue working beyond the traditional pension age.

You have many options with regards to drawing your pension. These include leaving it untouched, opting for an annuity or taking a flexible income (known as drawdown).

In order to access your pension in the most tax-efficient manner, and one that works best for your future plans, I would recommend discussing your options with an independent financial adviser (IFA).

You can find independent qualified professionals in your area via websites such as VouchedFor or Unbiased.

You’ve worked hard all your life to build your pension pot, so it’s a sensible step to take some guidance to ensure you get the best returns and keep taxation on your pot to a minimum.