Pension Freedom – Taxing Your Retirement Cash

Working out how much pension cash you will actually have can be rather taxing.

Remember that the following tax rules apply to UK taxpayers and that expats who are tax resident elsewhere will have a different pension tax regime. They should take local professional financial advice about the best way to take their pension cash.

Most pension savers have a tax-free personal allowance each financial year, which runs from April 6 to the following April 5.

It’s important to work out your annual income between these dates or you could find your calculations are wrong.

The Chancellor of the Exchequer announces the personal allowance each year, so retirement savers need to keep an eye on the allowance and adjust their withdrawals according to the basic and higher rate tax limits in each year.

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State pension and drawdown

This is how income tax is set against income for the 2015-16 financial year:-

EarningsIncome tax rate
Up to £10,6000%
£10,601 – £31,78520%
£31,786 – £150,00040%
More than £150,00145%


Here’s an example of how much tax someone aged 65 years old or over receiving the state pension of £115.95 a week (£6,029.40 a year) drawing an uncrystallised lump sum of £15,000 works out:-

Pension drawdown£15,000 
Other income for year£6,029 
Total income £21,029
Pension 25% tax free amount£3,750 
Personal allowance£10,600 
Tax free income £14,350
Taxable income £6,679
Income tax at 20% £1,335


This leaves a net annual income of £21,029 less £1,335 tax, which is £19,694.

Other income and drawdown

For someone aged 58 earning the national average annual income of £26,884 (Office of National Statistics 2013), drawing an uncrystallised amount of £30,000 from a pension, the figures work out like this:-

Pension drawdown£30,000 
Other income for year£26,884 
Total income £56,884
Pension 25% tax free amount£7,500 
Personal allowance£10,600 
Taxable income £38,784


Now, the remaining income is allocated to the different tax bandings, using the lowest first:

Tax bandTax rateTax due
£0 – £10,6000%£0
£10,601 – £31,78520%£4,237
£31,786 – £45,63440%£2,799
Total tax £7,036


This leaves the saver with a net income of £56,884 less £7,036 tax, which comes to £49,848.