Tax and State Pension

Tax and the State Pension

When planning for retirement, it’s important to understand your tax position and to factor in your State Pension entitlement.

Tax and your pension

The tax rules that apply to pensions differ before and after retirement.

Before you retire

Pension contributions are tax-free (up to certain limits – see Tax allowances below). For example, if you are a basic rate taxpayer, every £1 of pension contribution only costs you 80p.

When you retire

You will have the option of taking some of your savings as a tax-free lump sum. The maximum tax-free lump sum you can take is, broadly, 25% of the value of your benefits. You can take less than your maximum entitlement if you wish.

Alternatively, if you transfer out and take a flexible income as and when you choose, you will be able to take up to 25% of each income payment tax-free.

In retirement

Once you have taken any tax-free lump sum, your remaining retirement income will be taxed as earned income, except you won’t pay National Insurance Contributions.

If you take a flexible income and spread your tax-free entitlement, any amount above that will be taxed as earned income, except you won’t pay National Insurance Contributions.

Lump Sum Allowance

This is the limit on the total amount of tax-free lump sums (or tax-free element of lump sums) that you can take from your pension arrangements. This applies to pension commencement lump sums or the 25% tax free part of a lump sum from a DC Plan.

The allowance is currently set at is £268,275. Your allowance may be higher if you have or apply for a lifetime allowance protection.

Lump Sum and Death Benefit Allowance

This is the limit on the total amount of tax-free lump sums (or tax-free element of lump sums) that you can take from your pension arrangements plus serious ill-health lump sums and lump sum death benefits.

The allowance is currently set at £1,073,100. Your allowance may be higher if you have or apply for a lifetime allowance protection.

Lifetime Allowance Protections

A number of protections have been made available in the past allowing certain individuals to limit their exposure to the Lifetime Allowance and boost their tax-free lump sum entitlement. These include Fixed Protections, Individual Protections, Enhanced Protection and Primary Protection.

Despite the abolition of the Lifetime Allowance, the protections will remain relevant to the extent that they provide members with a protected right to a higher Lump Sum Allowance or Lump Sum and Death benefit Allowance.

If you have taken out any form of HMRC protection please ensure you confirm this to the administration team.

Your protection could be lost if you transfer your benefits to another pension arrangement.

If you have Lifetime Allowance protection, you should talk to a financial adviser when deciding how to take your benefits. See the 'Financial advice' page for more details.

Annual Allowance

The Annual Allowance is the amount of pension savings you can build up or contribute during the tax year without having to pay tax. From 6 April 2023, the standard Annual Allowance is £60,000.

Money Purchase (DC) Annual Allowance

This allowance applies if you have Defined Contribution (DC) savings and you access them as cash or transfer them out of the Scheme to access your benefits flexibly.

Doing so will reduce the level of your annual allowance for future pension saving - from £60,000 to £10,000 a year.

Where can you find out more?

For more information, see www.gov.uk/tax-on-your-private-pension

Remember!

The Company will pay for you to receive up to two sessions of impartial financial advice from Wren Sterling, who will be able to help you understand the tax allowances – see Advice.

The ‘Taking your benefits’ booklet also includes more about the Lifetime Allowance and Annual Allowance. You can download this from the Library.

The State Pension

When planning for your retirement, it’s important to factor in your State Pension entitlement:

the amount you’re likely to receive, and
when you will be eligible to start receiving it – your State Pension age.

You should consider the following:

The amount available

For the 2023/24 tax year, the maximum State Pension is £185.15 per week. Your State Pension entitlement will be subject to income tax in the same way as your other retirement income.

Annual increases

The State Pension is increased each year with effect from 6 April.

When to claim your State pension

You don’t receive the State Pension automatically – you must claim it, which you can do up to four months before you reach State Pension age.

You don’t have to claim State Pension at your State Pension age. You can, if you want to, defer it and receive a higher State Pension in the future.

To claim your State Pension entitlement,go to www.gov.uk/get-state-pension.

State Pension age

State Pension age is currently 66 for everyone.

It is set to increase to age 67 between 2026 and 2028, and a further rise to age 68 is planned between 2037 and 2039.

More about the State Pension

For more details about the State Pension, including when you will be able to claim and how much you could receive, go to www.gov.uk/new-state-pension.

If you have a query

If you have a pension-related query that isn't covered here or elsewhere on the site, contact the Pensions Team.

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