Flexible retirement income and drawdown tax. What does it all mean?

Once you reach 55, a whole host of opportunities will open themselves up to you. One such opportunity is the fact that you can at last access that hard-saved pension fund. Up to 25% of your savings can be taken tax-free, with the remaining 75% being subject to income tax. The level of tax payable depends on your total income for the year and your tax rate.

You’ll only have to pay tax if you choose to draw over the 25% limit. In this case, any income you withdraw will be added to the rest of your taxable income for that year, and will be taxed at 20% once it exceeds the personal allowance (£12,500 for 2019/2020). Therefore, if you were to take out a large withdrawal pushing you into the £40,000 to £150,000 tax bracket, the income could be taxed at 40%.

Your pension provider is required to deduct any tax before a withdrawal is paid and it’s likely that when you take a taxable payment for the first time, you’ll be taxed using an emergency tax code (it may be worth speaking to your pension provider about how you will be taxed).

How do you manage your pot?

After taking your tax free lump sum, usually you’ll move the rest into one or more funds that allow you to take a taxable income at times to suit you. The income you receive isn’t set, so payments can be adjusted periodically depending on how well your investments are doing.

You can also move your pension pot gradually into income drawdown. The 25% limit still applies to each tranche you move across, so you can take a quarter of the amount tax-free and place the rest into drawdown.

It’s vital that you carefully plan how much income you can afford to take under pension drawdown, as you don’t want to run out of money. Factors such as withdrawing too much, living longer than expected and poor investment performance can potentially hinder your drawdown plans. It’s also important to remember that drawdown income isn’t secure—it could fall or even stop completely.

That’s why it’s important to regularly review your investments. In fact, we would always recommend getting in contact with your financial adviser to help with this, as you want to be getting the most out of your pension and to avoid any unnecessary expenses or losses.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

For more information, do get in touch, we’d love to hear from you. You can call us on 01789 263888 or email hello@charterswealth.co.uk.