How Each Pension Option Is Taxed
| The pension options | What's tax-free | What's taxable |
|---|---|---|
| Leave your pot untouched | Your whole pot while it stays untouched | Nothing while your pot stays untouched |
| Guaranteed income (annuity) | 25% of your pot before you buy an annuity | Income from the annuity |
| Adjustable income | 25% of your pot before you invest in an adjustable income | Income you get from your investment |
| Take cash in chunks | 25% of each amount you take out | 75% of each amount you take out |
| Take your whole pot in one go | 25% of your whole pot | 75% of your whole pot |
| Mix your options | Depends on the options you mix | Depends on the options you mix |
Tax Efficient Drawdowns
Making sure you draw down from your pensions as tax efficiently as possible is critical and planning carefully around your actual needs could help to reduce your tax bill. If you are heading towards retirement, it would be prudent to seek advice to make sure you are prepared and well placed to get exactly what you need from your pensions.
Retiring Overseas
The process of pension planning can be further complicated if you are retiring abroad. Expats will need to understand the double taxation agreements in place between the UK and the country they are now residing in, which dictate where and how much tax needs to be paid.
PCLS payments are taxable in most places outside of the UK, so seeking advice on how your pension will be taxed in your new country is crucial to understanding your tax liabilities and reducing them where possible.
More Tax Options
- Expats can remain liable for UK inheritance tax without knowing. Most people think only UK assets are subject to UK IHT, but this is not the case.
- Capital Gains Tax (CGT) is a tax on gains, or profit, made on the disposal of assets, whether the disposal occurs due to the sale of the asset or gifting.
- Understanding the agreements in place between the country your assets are in and the country you are residing in is an important part of planning, particularly for those retiring overseas with UK pensions.
