Tax and pensions

made easy
Chapter 5 87
Pensions and retirement

Tax and pensions

Tax and pensions
When you are saving for retirement, it generally makes
sense to start to do so in the way that attracts the greatest
amount of tax generosity. The tax rules for pensions have
been substantially simplified to concentrate on the pension
itself rather than the type of pension you acquire.

The pensions industry paints its

products as a one-way ticket to a
whole host of tax benefits. What
it says is true, but what it tends
to relegate to the small print is
the return ticket. While pension
payments and pension investments
benefit from a whole range of tax
reliefs and concessions, HMRC
will take its cut eventually when
your pension plan turns into a
retirement income, even if this is
50 or more years into the future.
While pensions should be the
first consideration for people
planning for an eventual retirement,
they are not the only choice.
Some, especially the lower-paid,
might be better advised to do
nothing. Others may find it
advantageous to look at other
options, which offer more flexibility.
Tax savings are important, but see
them in a wider context, especially
BE CAREFUL!
This chapter describes the
relationship currently existing
between taxation and your
retirement income. Pension
provision is a very long-term
arrangement a 20-year-
old could still be drawing a
pension in 80 years time. With
increasing life expectancy,
many people now aged 40
will expect pension payments
in 50 or more years time. But
pension and tax rules have
changed many times over the
past half century. There is no
guarantee that they will remain
the same for the next half
century. This chapter sets out
the current tax position not
what it might be in the future.
Pensions should be the first
consideration when planning
for retirement.

Pension payments are covered on pages 9297. Information

on drawing your pension is explained on pages 100102 and
alternative savings methods are discussed on page 103.
 if you are planning on making although you can make voluntary you need to have paid full annual to either income tax or CGT. In
88 89
additional investments into a National Insurance payments. National Insurance contributions addition, when you come to retire,
pension plan beyond the basic (or had them credited for reasons you can take up to a quarter of your

Tax and pensions

Pensions and retirement

elements of an employer scheme. National Insurance such as unemployment, maternity accumulated fund as a tax-free lump
and your pension leave, or caring for someone but sum. It is worthwhile noting there
The pensions choice National Insurance is an additional not for time as a student) for at can be disadvantages to pension plan
Most peoples pensions are a mix tax in all but name. It is paid out least 11 years during your working savings despite the tax efficiencies.
of state retirement provision plus of your taxed income and can life if you are retiring at 65. In  Once you have made a payment
an income from plans taken out often be paid by those who have April 2016 this increased to 35 (or your employer has made a
during their working lives either no income tax liability in that year full years of contributions for the payment on your behalf), you
employed or self-employed. typically by people doing casual full state pension for those born cant generally have a refund,
You have a limited ability to or irregular work, such as students. after 5 April 1951. even if you would rather use the
influence your basic state pension There are, however, some areas If you paid somewhere between money for something else, such
and other state retirement payments. where your contribution record the minimum and the maximum, as buying a home, starting a
They are dependent on compulsory determines what state benefits you there is a sliding scale. Only Class 1, business or just having a good
National Insurance deductions over receive, including the state pension. 2 and 3 National Insurance payments time (although you can often
which you normally have no control, To qualify for the state pension, count for the sliding scale. transfer your pension pot between
Contributions from the now pension funds). The exception to
small number paying the married this rule is that you can have a
Tax-free state benefits for older people womens reduced rate dont count. refund of contributions youve
Some benefits are paid without deduction of tax or any liability to tax. Equally out of contention are Class 4 paid into a workplace pension if
 Winter Fuel Payment to help towards extra costs of keeping warm in payments made by the self-employed you leave the scheme within two
winter. This is paid to men and women born before 6 July 1952 at a and the 2% National Insurance years. This refund is limited to
current rate of 200 a year. There is no means test. It is limited to 200 surcharge on higher earners. the amount you paid in you
per household with a 100 addition where one person living in the house cant recover contributions paid
is 80 or over. If you are in this age group and receiving a state pension or
benefit, then you should get this money (paid in late November or early
Private provision by your employer, which will
December) automatically. If you are not, then you need to claim from Private pensions can be financed
mid-August onwards (see Qualifying years, opposite). from your own resources or from an
 The 10 Christmas bonus is tax-free it is usually paid along with the employer, or from a mix of the two.
Qualifying years
state pension. This amount has been unchanged since the 1970s. In general, theyre the most tax-
From 6 April 2010, anyone who reached state
 War Widows/Widowers Pension. efficient way to save for retirement. pension age only needed 30 qualifying years
 TV licence this is free where one person in a household has reached You either dont pay tax on the (this rose to 35 in 2016) for the maximum basic
75 or older. contributions you make or you state pension, instead of the previous 44 for a
 Attendance Allowance for help with personal care. can reclaim some or all of the tax man and 39 for a woman. So, buying in extra
 Pension credit a means-tested benefit topping up income to a on your payments later on. The years worth of National Insurance may be
minimum of 155.60 per week for single pensioners and 237.55 for money wasted although you might still be
pension itself can grow in a fund asked if you would like to do this by HMRC.
couples in 201617. You start to lose this benefit if your savings top
where most assets will not be subject
10,000. Pension credit is lost entirely if savings top 16,000.
 Travel pass for those over the state pension age the value and
validity of this varies according to your home address. London has Get a claim form for Winter Fuel Payment by calling the Winter Fuel Payment
special arrangements for all over-60s. There are separate schemes for helpline on 0845 915 1515, or textphone 0845 601 5613. Lines are open
England, Scotland, Wales and Northern Ireland. Monday to Friday from 8.30am to 4.30pm. Or you can download a claim
form from gov.uk search for Winter Fuel Payment.
 then be lost. If you gain a refund,
90
it will be adjusted for any tax
relief that you may have obtained
Pensions and retirement
on the contributions.
 Those with low earnings might
be better off not paying into a
plan as future payments could
affect means-tested benefits, such
as the pension credit scheme,
which is administered by HMRC.
 Tax freedom does not mean
investment success. Some
pension funds have returned less
than plan members contributed
there are investment risks.
Most pension plans allow you to
take the first 25% of the final
value as a tax-free lump sum.
Theres no longer any compulsion
to take an annuity, providing a
guaranteed income for life, from
money purchase or defined
contribution schemes, although
you may continue to do so. You
may take the entire money
purchase pension pot as a cash
sum (but not in a defined benefit
employer scheme, where the
pension is based on final salary
and years of scheme
membership). If you do so, it will
be added to any other income for
that year and assessed for income
tax. This can easily take you into a
higher tax band. So, if your sole
income from a state pension is
10,000, and you encash a
60,000 pension pot, the balance
remaining after the 25% tax-free
deduction (45,000) will be added
to your pension. Youll be assessed
as someone with an income of
55,000. The first 11,000 will be
tax-free, the next 32,000 will be
taxed at 20% (6,400) and the
remaining 12,000 will be taxed at
40% (4,800), giving a total tax
bill of 11,200. If you leave your
pension pot in a scheme that
allows drawdown this will
usually be via a Self-Invested
Personal Pension or SIPP youll
only be taxed on the amounts you
withdraw from the plan.
Auto-enrolling into a scheme
Most employees now automatically join
workplace schemes, which employers are
obliged to both offer and contribute towards.
These schemes apply to employees who are
aged between 22 and the state retirement age
(currently 65, but due to rise to 66) and earning
more than the income tax personal allowance
(11,000 for 201617). There is an upper earnings
threshold above which contributions are
voluntary set in line with the National Insurance
upper earnings level 43,000 in 201617. Both
employee and employer have to pay in a
minimum percentage although either or both
can increase this. The employer contribution
started at 1% in the first schemes and will rise to
3% by 2017. Employees can opt out but will lose
their employers payments if they do so. Both
employer and employee contributions are free
of income tax considerations.
Pension schemes at a glance
91
Type of pension How it works
Tax and pensions
State pension The new flat-rate scheme pays up to 155.65 a week (201617) for
a single person, based on their National Insurance contribution
record, not previous earnings. The new system is based on individual
National Insurance records so couples are treated as two individuals.
State second Paid to employees on top of the state pension. Earnings-related
pension but the formula is more generous to lower earners than SERPS. Carers
and some disabled people also qualify. It replaced SERPS. This ceased
on 5 April 2016 but previous contributions will continue to count.
Pension credit Main means-tested benefit for those of state pension age. Provides
a guaranteed minimum income of 155.60 a week for single people
and 237.55 for couples from April 2016.
Employers Your employer, and usually you, pay into the scheme. Your
schemes (final eventual pension depends on your final salary and the length of
salary) the scheme membership.
Employers You and your employer pay contributions, which are invested.
schemes (money Your eventual pension depends on investment performance and
purchase) annuity rates.
Personal pension/ A personal pension can be arranged through an employer as a
retirement group personal pension, or bought individually. Your final pension
annuity contract depends on investment performance and annuity rates. An RAC
(RAC) is an old-style personal pension arranged before April 1988.
Stakeholder A money purchase personal pension with capped annual charges
pension and no charges for stopping/starting premiums or transferring. Your
eventual pension depends on investment performance and annuity
rates. This has been replaced by auto-enrolment.
Auto-enrolment A scheme to oblige employers to contribute towards employee
retirement plans, although employees can opt out. It started with
the biggest employers and has been gradually rolled out to smaller
firms, with all employers on the scheme by April 2017. There is
nothing to prevent employers from signing up earlier.
For more information on National Insurance, see pages 3439 in the chapter
on working for an employer. An explanation of the different classes of
payment and what they entitle you to is given on pages 3738.

92
Pension payments
Pensions and retirement
HMRC has swept away the plethora of complicated rules
that looked at your age and the exact type of pension, which
determined the maximum amounts you could put into your
pension. There are still limits, but these are simpler and
apply only to a small, wealthy minority.
Paying into
private pensions
Anyone can save into a personal
pension from the day they are born
to the age of 75. There is no ceiling
to the actual payments you can
make, but there are limits on the
annual amounts paid in if you
wish to collect tax relief. There are
few instances where it is worth
contributing to a pension if you
cannot get tax relief on the way in
and these only apply to those on
very high earnings. In this case,
you might be better off saving for
your retirement in a different way
due to the drawbacks of pension
plans indicated on previous pages.
Annual contribution limits
To get tax relief, you can pay in
the higher of 100% of UK earnings
up to 40,000 a year or 3,600 if
you have no or low earnings.
 100% of your UK earnings
up to 40,000. UK earnings
basically means your pay and
benefits from your employer if
youre employed, or your taxable
profits if youre self-employed.
This figure includes bonuses,
overtime, commissions and
any other payments additional
to your normal basic salary or
wages. These do not have to
be regular payments and they
can include any freelance or
spare time earning, including
activities such as online trading
or car boot sales. However, they
do not include dividends (even
from a company that you own
100% and from where you have
elected to take dividends
instead of a salary) or interest
from savings, or capital gains.
You get this at your highest tax
rate first (see Judiths case
study, opposite).
In April 2016, the 40,000
allowance fell for those earning
more than 150,000, tapering
to 10,000 for salaries in
excess of 210,000.
 3,600 a year. This amount
can be put into a plan either
for yourself or for someone else
who might not have a plan in
their own right or be able to
contribute to one because they
have no earnings. This might
include a young person or a
non-working partner. Even if
the recipients are not taxpayers,
the contribution will attract
tax relief at 20%. The 3,600
is the gross amount but you
do not have to find that much
in cash only that amount
with the basic rate removed
2,880. HMRC will
automatically add the tax
back so the pension company
Case study: Judith
Judith earns 100,000 (well above
the basic-rate level) and contributes
20,000 to her private pension. She
therefore receives the basic-rate part
of her relief automatically and a refund
of the gap between the basic and the
higher rate. On a 20,000 payment,
Judith needs to pay 16,000 in cash,
which is equal to the 20,000 less 20%
basic-rate relief. HMRC will give her
pension provider the gap between the
net and the gross figure. The pension
provider, however, does not know what
Case study: Maria and Joanna
Maria earns 25,000 a year. Normally,
she puts 1,000 a year into her personal
pension plan. This is all she can afford.
This year, she has been left 5,000 in her
grandmothers will. She wants to boost
her pension so she adds this 5,000 to her
normal contribution. Although the extra
money itself does not come from earnings,
the 5,000 can be used to replace her
normal spending money and so free up
part of her salary for tax relief purposes.
Under the same will, her mother Joanna
inherits 50,000. She earns 20,000 a
receives the full 3,600,
93
which it will invest for you.
Higher-rate taxpayers can
Pension payments
reclaim the gap between the
basic 20% and the higher 40%
rate via their self-assessment
form or HMRC form PP120,
which you can get from your
local tax office. Those on the
top 45% rate can also claim
in a similar way.
level of tax Judith pays, but as she is
in the 40% tax rate, she is able to get
a further 4,000 back the 20% of
20,000 that represents the difference
between the basic and the higher
40% tax rates as tax relief is at the
highest personal rate. This extra tax
relief usually comes back to the taxpayer
through the self-assessment form.
However, Judith cant claim back any
National Insurance and that includes
the 2% National Insurance surcharge
on higher incomes.
year and currently has no pension plan
contributions. The most she can put
into her plan and qualify for tax relief
is 20,000.
Alternatively, Joanna could spread the
30,000 balance of her inheritance over the
two subsequent tax years, should she wish
(and there is more to this decision than tax
considerations a good financial adviser
will help). If she does decide to put more
money into her pension plan, Joanna can
end up with all her inheritance in a scheme
within three years should she wish.

94 Case study: George
George is a company director, earning
Pensions and retirement
140,000 a year. His pension fund is already
worth 950,000. He had to calculate both his
annual salary and any growth in the fund to
see how much longer this fund will remain
tax-free. If his fund grows at 10% (95,000),
he will exceed the lifetime limit.
Once he has hit the overall maximum (either
for his lifetime or for a year), he will have
to make other arrangements for an annual
payment towards his retirement should he
wish. His accountant may recommend an
unapproved scheme or other form of saving.
The lifetime limit
but only for the very
well off
There is a 1m lifetime limit on
the amount of pension saving that
you can have that qualifies for tax
relief. This figure includes the
value of all your pensions, whether
bought by yourself or contributed
to by an employer, and the potential
worth of any payments to your
family if you die.
If you are likely to hit these limits
in the future, take advice. There may
be a balance between tax relief now
and a future tax charge that you may
wish to consider. You will also have
to factor in how your fund may grow
before you take the benefits.
This lifetime allowance is
calculated when you take the
benefit. This is how it works:
 You start off with the lifetime
limit and then you subtract
all or any of the following as
they are cashed in:
t he value of any personal
pensions, including the
tax-free lump sum.
the value of any additional
pensions from your employer.
t he initial annual value of
employer pensions (those
based on your final salary and
how long you have worked
there) multiplied by 20 (for
example, a 40,000-a-year
plan would soak up 800,000
of the allowance, ignoring
any asset growth).
lump sums, which are payable
on your death.
 What is left over is then taxed at
55% on any cash lump sums you
take and 25% on any income you
elect to take. This is known as
the Lifetime Allowance Charge.
Pension tax
rules that hit
the wealthier
There is now a 40,000 annual
maximum level for tax relief on
pension payments with additional
restrictions on those earning over
150,000 from 201617 (see page
92). This is to prevent the most
well off shovelling huge amounts
of their money into plans to gain
tax relief at their top rate. However,
pension buyers can carry forward
up to three years worth of unused
allowances (see box, opposite).
There are a number of
unapproved pension plans for
those wishing to contribute in excess
of the annual limit. These are often
used in conjunction with specialist
tax planning, often aimed at
directors and senior employees
of small firms. They require
professional advice.
In general, without tax relief on
contributions, there is little point
in most circumstances in locking
up cash in a pension scheme that
cannot be accessed until the plan
holder reaches 55. It is always
worth considering investing in an
Individual Savings Account (15,240
in 201617, but increasing to 20,000
in 201718), where assets also grow
free of income tax and capital gains
tax. There is no tax relief on money
going into an Isa but, unlike
pensions, withdrawals of either
income or capital attract no tax.
Getting tax relief
How you get tax relief on
contributions depends on the type
of pension scheme you have an
employer-based plan or a plan that
you have arranged for yourself.
From employers schemes
Your contributions are deducted
from your pay before tax is worked
out. As the money comes from the
gross amount you receive, it means
you automatically get the right
amount of tax relief. This applies
whether your tax rate is at the
basic- or a higher-rate level.
Deductions include additional
voluntary contribution payments
amounts you pay extra into an
employers sponsored fund but any
payments from your employer on
your behalf do not count. It
does not matter if the employer plan
Tax tip 95
The pension contribution tax
Pension payments
rules are designed to prevent
high earners from shovelling
cash into a pension plan and
receiving tax relief. You may
carry forward up to three years
of unused allowances. This is for
those on typical incomes who
might have a one-off spike in
earnings, such as a bonus or
a redundancy payment.
Someone whose personal and
employer payments amount to
10,000 a year for three years,
will be able to carry forward
up to 90,000 (three times
40,000 less the actual
contributions) providing they
have sufficient earnings in the
year the carry-forward is used.
Carry-forward can only be
used when there is some pension
contribution to a registered
pension scheme in the year or
years claimed. There are also
complex anti-avoidance rules
to prevent people from altering
their remuneration patterns to
take advantage.
is based on your final salary or on the
fund that accumulates from the
investment of your actual
contributions. The amount shown as
your taxable earnings on your annual
P60 form from your employer is your
earnings after pension contributions.
From personal pensions
These include Stakeholder
Pensions you arrange for yourself
and Self-Invested Personal
Pensions (SIPPs) (see page 98).
The amount you pay is treated as
if basic-rate tax has already been
96 deducted. The pension provider Salary sacrifice then invested by the employer on examples in this section assume that
97
reclaims the tax and adds it back Heres a paradox that more people your behalf. The figures can be the money remains unchanged.
to your pension. Everyone gets are using you can reduce your complicated but it can mean both The maths remain attractive for

Pension payments
Pensions and retirement

this basic-rate tax relief up to gross pay while increasing or at
the 3,600 limit, whether or not least retaining your pension
they are a taxpayer. So non-rate payments to fund your future
taxpayers get a tax bonus on their retirement pay but at the same
pension savings. Higher-rate time, you actually take home
taxpayers can claim extra tax more pay. Its known as salary
relief either through their tax sacrifice and can only work if
returns or form PP120. you and your employer agree
The only exceptions to this on it. The more you earn, the
rule are personal plans started more it is worth exploring
before April 1988. These are known this option.
as retirement annuity contracts What you do is to agree to
and you pay contributions gross earn less but ensure the salary you
and have to reclaim the relief (at have given up goes into your
your top personal rate) through employer pension plan. It works
the tax return. Non-taxpayers because while you have to pay
cant reclaim the tax. National Insurance on your entire
salary (including the 2% surcharge
where applicable), money that
BE CAREFUL! your employer puts into your
Salary sacrifice can affect scheme does not attract employers
your eligibility for home loans National Insurance. Effectively,
(usually based on a multiple of you are giving up money that
your pre-tax earnings) and, in you would normally earn to
some cases, your future state
your employer, so reducing
pension. It may not be suitable
for those in the final years of your National Insurance bill
a final salary scheme. Take (partly offset by a loss of pension
professional advice. contribution relief).
The salary you have sacrificed is
Jargon buster
Salary sacrifice/Sacrifice scheme A plan where you control the investment
You agree with your employer to give up content you can include a wide variety
part of your salary in return for benefits, of assets but not residential property.
which, because they have income tax or Stakeholder Pension A low-cost money
National Insurance advantages, are more purchase scheme offered by most
valuable than the salary foregone. employers that has now effectively been
Self-Invested Personal Pension (SIPP) phased out in favour of auto-enrolment.
sides of the agreement are better
off. Various major employers have
offered sacrifice schemes they can
be used by those with a wide range
of earnings from the very well off to
those on average earnings or less.
Matching
contributions
Some employers offer to match
extra contributions that you
make towards your occupational
pension fund. This might be
on a pound-for-pound basis
or a 50p-for-each-pound basis
or some other ratio.
Putting more of your money
into the workplace plan when
the employer recognises that
with extra money is well worth
thinking about the more so if
you are a higher-rate taxpayer.
A 40% taxpayer in such a
scheme pays in her or his extra
pound and then receives tax relief
at 40%, so the real cost is 60p.
When the employer puts in a
further 1, the pension fund
member has gained 2 more
for the outlay of 60p. If you fall
into this category and are old
enough to draw your pension
and you decide to cash in the
scheme, you can get 50p of that
2 back in cash as a tax-free lump
sum. That leaves 1.50 worth of
pension from spending just 10p.
Investment conditions will alter
this arithmetic for simplicity, the
the 20% basic-rate taxpayer. If you
are in this category, you end up
paying 80p (your 1 less 20p-in-
the-pound tax relief) for 2-worth
of pension fund contribution.
If you cashed in your plan on
retirement, you would get 50p
tax-free (again leaving aside
investment considerations),
leaving you with 1.50 in a
pension plan at the cost of 30p.
For schemes that give 50p
for each 1 you put in, the 40%
taxpayer ends up with 1.50 for
a net outlay of 60p. On reaching
retirement, the 25% tax-free lump
sum is equal to 37.5p, so this
pension fund member would get
1.125 for the equivalent of 22.5p.
Flexible benefits
A growing number of employers
offer flexible benefits packages
where you can choose from a menu
that might include extra pension,
extra holiday, private medical care,
a company car, or company gym
membership. Employees can then
mix and match to the maximum
benefit level agreed with the
employer.
Most of these benefits are
taxable because they have to be
listed on your P11D annual return
(see pages 1011 in the chapter on
working for an employer), but if a
pension is on flexi-offer, you will
not be taxed.
 Many will opt for a SIPP without will then try to sell you a SIPP, which
98 99
personal advice, but not all SIPPs are will accept these assets, as most plans

Special pension plans the same. Besides differences in cost will refuse to take them. They will

Special pension plans

Pensions and retirement

and coverage the more expensive also advise you that putting your
may include more asset types some money into their SIPP will avoid the
Pensions have been substantially simplified. There are still may be sold by organisations that are tax you might have to pay if you
a number of specialist pension plans around mostly aimed at less careful than others in monitoring simply withdrew part or all of your
those who either control their own business or are employed what goes into the plan. pension in cash. These firms often
in senior positions. The difficulty is that virtually any disappear as fast as they appear. There
asset can go into a SIPP; the sellers of is no compensation scheme for those
There are some very specialist (and especially of withdrawal in the that asset can claim that it qualifies who invest in such plans.
arcane) pension plans, including new era of pensions freedom. for tax freedom and that, therefore, As with all other pensions, its
executive pensions and pension You may be able to convert an it is HMRC Approved. There is no almost impossible to replace a
mortgages, but very few pension employers final salary pension such list of approved investments working lifetimes savings if you
buyers have these. The main where payments depend on your because almost anything can go into lose your money no matter how
minority plans are Self-Invested last pay cheque and the number of a SIPP except residential property. tax-free the asset is depicted.
Personal Pensions (SIPPs) and Small years you have worked for that firm You could invest in mainstream cash, Pension and other regulators are
Self-Administered Schemes (SSASs). into a SIPP. This is rarely a good bonds or shares, or you could buy working to prevent these companies.
idea and should not be undertaken into exotic assets such as Brazilian
The self-invested without professional advice. forestry, wine, holiday hotels in Small self-
personal pension As with all other pensions, its resorts still to be built, or even administered
(SIPP) almost impossible to replace a taking a share in American divorce schemes (SSAS)
The SIPP is a form of personal working lifetimes savings if you settlements or in gold mines that The SSAS allows small companies
pension where, unlike in an insurance lose some, most or all of your SIPP. have yet to produce gold. These to put large amounts into pension
company or employer plan, scheme For many of the 350,000-400,000 assets are impossible to price often plans (usually for key employees
holders decide what investments are who come up to retirement age each they are sold for 10 or 20 times the or directors), without reference to
made. These investments encompass year with a personal pension pot, a amount the advisers paid. the individuals own earnings or the
a wide choice, ranging from the safety SIPP will appear to be the best way All of these can easily be presented limit on the annual amount they can
of cash via mainstream equities and to control finances in a tax-free as a better investment than the pay into a plan. The contributions
bonds to high-risk investments such environment. As long as the cash mainstream. The advisers who sell can be offset against the corporation
as Latin American forestry or holiday stays within the plan, it will grow these, sometimes by cold-calling or tax the company would otherwise
homes in Haiti. Very few assets are without tax concerns. sending spam emails, will often pay on its profits. The scheme can
banned, the most important is Although the government emphasise that your gains will be be used to build up a pension plan
residential property. Plan holders can has promised to offer advice on totally tax-free, provided you keep far more quickly than with normal
delegate their strategy choices to an the new pensions environment them in the plan. Some will talk employer contributions. However,
adviser should they wish. to those coming up to retirement, of investments that offer a HMRC can insist that payments
Besides investment freedom, and this looks patchy, with just over guaranteed return of 15-20% a into the scheme are broadly in line
the same tax advantages as other 40 face-to-face advice centres to year far better than anything with the real worth of an employee
pension plans, SIPPs offer flexibility cover England and Wales. else youll be offered through or director. This prevents firms
traditional investment routes. shovelling fortunes into tax-free
For further advice, seek an independent financial adviser the These advisers, many based plans for those who would normally
Personal Finance Society has a directory of authorised advisers at overseas to avoid UK regulation, be low or average earners.
thepfs.org/yourmoney.

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Drawing your pension
Pensions and retirement
While youre under 55, the only choices to make about personal
and other money purchase pensions are how much to contribute
and which investment fund or type to select. When you want
to retire, you can choose when you want to draw your pension
and, often, how much.
When you can claim
your pension
The minimum age at which you
can take your state pension is
now 65. The state pension age
for both women and men rises to
66 in 2020 with further increases
planned as longevity increases.
The minimum age for taking a
private pension is now 55 it
used to be 50.
You can draw your pension
earlier in a few cases for example,
because of serious ill health. Your
pension is counted as income for
income tax purposes, no matter
how old you are, but you do not
pay National Insurance on it.
If your employers scheme allows
it, you can draw part or all of your
pension while continuing to work
for your employer. In some cases,
you will be able to contribute
towards a second pension plan
(but not any subsequent plans),
providing you are under 75.
This may enable you to take the
tax-free lump sum, which you
can spend, and continue to pay
into a plan, thus potentially
shielding your continuing
earnings from tax. Check if this
is available with your employers
pension department.
Tax-free cash
In virtually all cases, you can take
up to 25% of any pension fund
as tax-free cash, providing the
scheme rules allow it only a
very few old (and generally very
small) closed occupational schemes
might not have this facility.
With a money purchase scheme,
its simple to work out the amount
of cash you can take. Its 25% of
your total pension pot. Its more
complex with a final salary
employer plan (or defined benefit
scheme), as it depends on the rate
at which the scheme lets you
exchange pension for cash. Your
employer will give you the figures
shortly before you retire.
You dont have to take the
tax-free cash as this will reduce
your pension in proportion
taking a 25% lump sum would cut
a 1,000 monthly pension to 750.
Generally you should do, however.
Even if you dont want to
Tax tip 101
spend the money, it can be
If the total of your non-state pensions is below
used as an investment to generate
Drawing your pension
the 1% line, consider encashing them during
additional income. Those on a year when you have no or low earnings to
means-tested benefits may wish maximise the use of your personal allowance.
For those who are not economically active,
to avoid taking a pension lump
that could mean encashment before reaching
sum as that could push them
basic state pension age.
above savings limits.
Paying tax on
your pension pot remains tax-free. The rate you
You cant normally withdraw pay is the highest from adding the
money from your personal pension withdrawal to your other income.
pot until you reach 55, but there Here are some examples:
are exceptions for the terminally  Jane has built up a 300,000
ill. Once you reach that age or fund. She withdraws it all in
whenever you decide to start to 201617 and buys a luxury
spend your retirement savings car. She will have to pay
you are taxed on withdrawals income tax based on the
either directly or via an annuity, 300,000 plus any other
although the first 25% of any sum earnings, which in this year
taken out for whatever purpose amount to 60,000. Her total
Buying an annuity
It is now an option rather than a compulsion to buy an annuity, which
turns a pension lump sum into an income for life. However, although
many see annuities as poor value and dislike the once-for-all-time decision
needed on purchase, others continue to buy them for convenience,
simplicity and certainty of payment. Annuity payments from pension
plans are treated as income if you earn 3,000 a year from an annuity,
this will be added to the state pension along with any other income
(such as from savings) to determine a total for income tax calculations.
But anyone opting for the traditional annuity should first take the
25% tax-free lump sum option from their pension pot. This can be
spent, invested or used to purchase an additional annuity, one that
is taxed more lightly than a pension annuity (previously known as a
compulsory purchase annuity).
An annuity bought with money that does not come directly from a
pension pot is called a purchased life annuity. The income from this
is taxed at a special, lower rate than that normally applied. It takes into
account the part of each annuity payment that consists of the repayment
of your own capital. The formula is complicated and depends on your age
the older you are when you purchase the plan, the more you will benefit.
 income is 360,000. She
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earns too much to qualify
for the personal allowance.
Pensions and retirement
The first 31,785 will be
taxed at 20%, the amount
between 31,786 and
150,000 attracts 40%, with
the remaining 210,000
taxed at 45%, giving a
total of 148,143.
 Ahmed has a 60,000 fund.
He decides to withdraw
5,000 in 201617 to
supplement other pensions
and income amounting to
20,600. His total income
is now 25,600. The first
10,600 is covered by his
personal allowance, leaving
a taxable income of 15,000
at the basic 20% equal
to 3,000.
What happens
when you die?
The new pensions freedom from
April 2015 means many more
people will have assets remaining
in their pension pots on their
death. Previously, while these
remained outside the scope of
inheritance tax, there were subject
to a special 55% death tax.
This is now abolished. You can
now pass on tax-free pension funds
to beneficiaries without paying
55% tax. If these funds remain in
pension funds, there is no tax to
pay. However, should any part of
these funds be withdrawn an
option for beneficiaries aged 55
or over the amount will be
added to their income for that
year and taxed as income at their
highest marginal rate.
If you die before you reach
75, your beneficiaries not
necessarily family members
will pay no tax if money is
drawn down from the pension
plan. If you die after that age,
money withdrawn as income
will be taxed by adding it to the
recipients other income and
so at the rate that applies to
the total. The money will not
attract inheritance tax.
Pension holders can nominate
(or later change) beneficiaries
to their pension provider via an
Expression of Wish. This is not
legally binding but providers
will normally take notice of
these wishes.
These new rules may make it
advantageous under inheritance
tax rules for holders to keep
pension plans instead of encashing
them, perhaps living from other
assets such as Individual Savings
Accounts, which are liable for
inheritance tax calculations.
Other retirement savings
Pensions offer a powerful set of tax advantages including tax
relief on payments made into a scheme, and a substantial degree
of tax freedom for the investments the scheme makes. There
is a tax-free lump sum when you draw your pension on retirement.
Pensions do have drawbacks in
return for the tax help. Once you
have paid your money in, you cannot
have it back (except when you leave a
company scheme within the first two
years). You can, of course, save for
your retirement in any way you
wish, including direct investment
into the stock market or buy-to-let
properties. The main alternative,
which is attractive from a tax point
of view, is the Individual Savings
Account the Isa.
Everyone aged 18 or over can
invest up to 15,240 (201617) a
year in a variety of funds, investment
trusts or, less commonly, individual
shares. You can also invest part of
your fund into cash but not into
direct property purchases.
The big drawback for Isas over
pensions is that you dont get tax
relief on payments on the way in,
so you may not be able to afford
to invest as much. However, like
pensions, they grow in a tax-
favoured environment with no
income tax or CGT to worry about.
Unlike pensions, you can cash
them in when and how you want.
You dont have to wait until you are
at least 55 if you need the money
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Other retirement savings
before then. Equally, you can keep
them as long as you like.
You can withdraw the tax-free
income to help fund your retirement
as and how you like there is no
need for complicated vehicles such
as drawdown funds, which may be
helpful for the many whose funds
are not large enough to warrant the
expense and hassles of such a fund.
Pension questions
on your tax return
If you get the main tax return (SA100), fill in
question 11 if you get a UK pension from any
source. You will need details of the state
pensions you are entitled to so call Pensions
Direct on 0845 301 3011 or get form BR735
from your local Pensions Centre. If you receive
an employers pension, or another type of
private pension, you should get a P60.
For personal and stakeholder pensions, enter
the gross amount that is paid to all policies
during 201516 in question 14. Dont include
employer contributions or amounts you pay
into employer-sponsored schemes.
Contributions are made net of basic-rate tax
relief so you must add this back. Divide what
you paid by 80 and multiply by 100. So if you
pay 100, the grossed-up amount is 125.
You have to enter old-style retirement annuity
contracts separately on to your tax return.