Tax on pension: How much each pension option is taxed depending on what you do with pot

When taking money from a pension pot, 25 per cent is tax-free. Income Tax is paid on the other 75 per cent. This tax-free amount doesn’t use up any of the Personal Allowance – meaning the amount of taxable income one doesn’t need to pay tax on. The government website details an overview of how much tax a person may pay on the money they withdraw from their pension pot.

It lists some of the different pension options, as well as what’s tax-free, and what’s taxable.

For instance, to leave the pot untouched, the whole of it while it stays untouched is tax-free.

When it comes to a Guaranteed income (annuity), 25 per cent of the pot before one buys an annuity is tax-free.

Then, income from the annuity may be subject to tax.

If the pension option is an adjustable income, 25 per cent of the pot is tax-free before one invests in an adjustable income.

The income that is gotten from the investment is then taxable.

Should a person take cash in chunks from a pension pot, 25 per cent of each amount taken out is tax-free, while 75 per cent of each amount taken out is taxable.

If a person takes their whole pot in one go, then 25 per cent of their whole pot is tax-free, while the remaining 75 per cent is taxable.

When it comes to a person mixing their options, the answer of what’s tax-free and what isn’t will depend on what options are mixed.

There are other things that a person may need to pay Income Tax on.

This includes earnings from employment or self-employment and the state pension.

Any taxable benefits one may get and any other income such as money from rental income could also be subject to Income Tax.

READ MORE: Are Universal Credit payments taxable? Current tax-free & taxed state benefits – full list

The government website Pension Wise allows people who are aged 50 or over and have a defined contributions pension to book a free Pension Wise appointment.

It details how an appointment is a conversation with a pension specialist, during which time a person can talk about the options they have for taking their pension money.

It sees the specialist explain the pension options they have and how they are taxed, as well as suggesting some next steps to take.