How will I be taxed when I withdraw money?

Tax rules change over time, different rate bands apply according to how much income you have, and different financial products are taxed in different ways. So it's hardly surprising if you're unsure how taxation might affect your retirement planning.

Here's some guidance on how you'll be taxed when you withdraw money, based on our understanding of 2016/2017 tax year rules. Please be aware that tax treatment depends on your individual circumstances and may be subject to change in future.

Private pension

A pension is a long-term investment product, to provide for your life in retirement. Although it's not designed for short-term access, it is possible to take all the money in your pension as a lump sum – provided you're aged 55 or more.

You'd need to think carefully before deciding to do this. Here's how the tax works out:

  • The first 25% of your fund will be tax free
  • The remainder (if you take it as a lump sum) will currently be taxed at your marginal rate. Your pension provider will deduct this tax. Use our pension withdrawal tax calculator to get an idea how much income tax you might have to pay.

Annuity

A pension annuity provides a guaranteed income for life. It could also continue to provide an income to your dependants for a set period after your death, depending on the options you choose.

Any income you take via a pension annuity will be taxed at your marginal rate of income tax. Your annuity provider will deduct this tax.

Income drawdown

Income drawdown is a way of taking an income from your pension fund. You can use the money you take from income drawdown to retire fully, or you might use it to ‘semi-retire' and supplement your earned income.

While you're making withdrawals from your pension fund in this way, the remainder of your fund continues to be invested. This means it will still have the potential to rise or fall in value. Any growth will be free of UK income and capital gains taxes within your fund, but withdrawals you make are subject to income tax

ISAs

You can now save or invest up to £15,240 every tax year in an ISA. There's no income tax or capital gains tax on any money you receive from an ISA. However you should be aware that some investment returns may be received by the ISA manager after tax deductions, or with tax credits that cannot be reclaimed.

You can now withdraw money from an ISA and pay it back in again without affecting your £15,240 allowance. You just need to make sure that any money you withdraw is paid back in during the same tax year.

A general investment account

This is simply an investment product where you can invest directly into investment funds.

Any interest you receive on your investments will be taxed at your marginal rate and when you cash in an investment any gain may be subject to capital gains tax.

When certain types of investment products pay you income, the provider sends you a tax voucher. The voucher will show two pieces of information:

  1. The amount of income you’ve earned.
  2. Where applicable, the amount of tax which has already been paid by the fund manager on your behalf.

The tax voucher provides you with the information you’ll need for your self-assessment tax return form, which you may need to complete and return to HMRC.

If you’ve received income from more than one fund of this kind – for example, dividend payments from three funds investing in shares – you’ll need to add up the total amount and insert the figure in the appropriate boxes on the tax return form.

Don’t forget, there’s an annual deadline for completing your self-assessment tax return form, if you have to complete one, and paying any tax due. If you miss these deadlines, you’ll have to pay a fine. To find out more about this, and tax issues in general, you can visit the HMRC website.

Taxation on dividends

The first £5,000 worth of dividends, in a tax year, will be tax free (taxed at 0%) and there will be no accompanying 10% tax credit.

New Personal Savings Allowance

From April 2016, if you're a basic rate taxpayer, you'll get a personal savings allowance of £1,000. This means that no income tax is payable on the first £1,000 of interest you earn across all your non-ISA savings each year.

If you're a higher rate taxpayer, you'll get a smaller personal savings allowance of £500. If you pay tax at the additional rate, you won't receive a personal savings allowance

Pension Wise has been set up by the government and offers free and impartial guidance for people retiring with defined contribution pensions. It will help you understand what your choices are and how they work.

You'll be able to get help on the Pension Wise website, over the phone or face to face.

If you are approaching retirement we recommend you get guidance or advice to help you understand your options.

Tax help for older people

A video from the charity Tax Help for Older People can help you understand the tax on your pension withdrawals.

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