Retirement
INFOGRAPHIC: Your pension tax bill exposed
From April, retirees will be free to withdraw money straight from their pension funds, as and when they choose, much like savings held in a bank.
However, while the new regime greatly improves pension accessibility, it does not transform your pension into a current account; while retirees can withdraw a quarter of the overall total tax-free, 75 per cent will be taxed as income.
To use a simple example, if you have a £150,000 pension, you will be able to withdraw £37,500 tax-free. If you were to withdraw the entire amount in one go, then 75 per cent (£112,500) of the withdrawal would be taxed as income.
In short, if you withdraw your entire pension at once, you could be left with a sizeable tax bill.
The following table illustrates how much of your pension is taxable and how much tax you may have to pay, depending on your additional income and how much you choose to withdraw.
Of course, the most tax-efficient option is to withdraw your funds in small quantities, across several tax years. For retirees with no other sources of income (e.g. part-time employment, investments, interest on non-ISA savings), the maximum income tax to be paid on a withdrawal would be 20 per cent – and pensioners also qualify for the personal tax-free allowance of £10,600 annually.