Pension Tax Rules

All income you receive from any pension schemes is taxable, however, with some pension plans you are permitted to take a tax-free lump sum when you first retire of up to 25% of the capital value of your pension fund.

Taxable Income

A taxable income amount sums up all the income from savings, a job, investments, the State Pension, any taxable State Benefits and income from a retirement annuity, personal, stakeholder and/or company pension. If the total amount of your taxable income is bigger than your personal tax allowances, then you will be required to pay Income Tax on any amount above your allowance. However, certain income does not class as taxable, such as National Lottery and Premium Bond winnings, Pension Credit, interest from National Savings Certificates, Working Tax Credit or Child Tax Credit and lump sum pension payments.

Your Tax Free Personal Allowance

Everybody is entitled to a Personal Allowance of £8,105 (2012/13). However, this allowance is higher if you are aged 65-74 (£10,500), and still higher if you are 75 or over (£10,660). These age related allowances decrease if you earn over a certain amount (£25,400 in 2012/13) by £1 for every £2 over the income limit. In addition to your personal allowance, you can claim Blind Person's Allowance if you are certified blind. In the 2012/13 tax year, this amounted to £2,100, and would be added on to any personal and age-related tax-free allowance.

Do I Need To Pay Tax?

When you retire from work, you don’t need to pay National Insurance contributions anymore. However, if the income you receive from your pensions and other sources is more than your tax-free allowance, then you will still have to pay Income Tax. Before you reach state pension age, you will be contacted by HM Revenue & Customs (HMRC) to help you calculate whether or not you will need to pay income tax after you retire. If your taxable income is less (or the same) than your tax-free allowance, then no further action will be necessary, but if your income is greater than your allowance, then you must inform HMRC about it.