Want to know what the current tax year rates and allowances are? Please read the
PDF file: Tax Year Rates and Allowances 2023/2024 PDF size: 582KB where you can see the figures for the current and previous tax year.
You can use some, or all, of your pension pot to buy an annuity, usually taking up to 25% of the amount selected as a tax-free cash sum. An annuity gives you a guaranteed income for life, or for a set number of years, depending on the type of annuity you buy.
Types of annuity
- A Lifetime Annuity will pay you a guaranteed income for the rest of your life.
- A Flexible Annuity will allow you to vary your income, perhaps a larger amount now, and a smaller one later on.
- A Fixed Term Annuity will provide you with a guaranteed income for a set number of years only.
You can also add other options like a pension for your spouse, partner or other financial dependants that will continue to be paid if you die before them. You could also choose your payments to increase each year, for example in line with inflation, or remain the same. Annuities can also be paid monthly, quarterly or even annually.
The income you get from an annuity is taxable and the amount of income your pension pot could buy might vary significantly. If you have any health or medical conditions, or relevant lifestyle factors such as smoking you may be entitled to a higher annuity income. No single provider offers the best rate in all circumstances so it is important you shop around to choose the best option for you. Even if you don’t qualify for a higher income with one provider, you might with others.
Although there is no maximum you can pay into a pension, the government has put in place an ‘annual allowance’ which includes any money that you pay in and any money that an employer pays in on your behalf, to this plan or any other pension plans you may have.
If you exceed the annual allowance you will pay tax on any amount paid above it, even if that amount was paid in by someone else.
For high earners the annual allowance is reduced when their annual income is over £200,000.
When you decide to access your pension savings your annual allowance may be reduced depending on the options you choose. This is called the Money Purchase Annual Allowance (MPAA).
There is also a lifetime allowance. If your pot is worth more than the lifetime allowance you will pay additional tax depending on how the pot is paid to you.
These allowances can change with each new tax year, depending on what the government sets out. Download our Tax Year Rates and Allowances booklet PDF file: Tax Year Rates and Allowances 2023/2024 PDF size: 582KB to keep up to date on what these allowances are, and how they could affect you.
Automatic enrolment earnings triggers
You will be automatically enrolled if you're:
- aged between 22 and State Pension age (see State Pension for more details).
- paid over a certain amount each year, known as the automatic enrolment earnings trigger.
- and are not already in a suitable pension scheme offered by your employer and paying at least the minimum contributions.
Automatic enrolment qualifying earnings limits
The qualifying earnings upper and lower limits are set by the government and are the earnings on which the minimum contributions for automatic enrolment are calculated. Your employer will tell you the earnings on which your contributions are based.
All employers must automatically enrol their employees into a workplace pension scheme subject to certain eligibility criteria. Although you may opt out, they must re-enrol you every three years to encourage you to start saving into your pension pot. You will have the right to opt out again.
Cash lump sum
You can take some or all of your pension pot as a cash lump sum from age 55. Normally 25% of each lump sum you take will be paid tax-free and the remainder will be taxable as income.
Drawdown is a way of taking a taxable income from your pension pot. Historically the amount that most people were able to take in this way was limited to a percentage of an estimated annuity that's calculated using government rates.
Since April 2015 people have had more freedom about how and when they can take an income direct from their pension pot. Whilst any existing capped drawdown can continue beyond 6 April 2015, anyone wishing to start drawdown from this date will be taking flexi-access drawdown.
A personal or workplace pension (also referred to as money purchase schemes) where contributions and investment performance dictate how much money you have available to provide an income for retirement. There are a number of options from age 55:
- leave your pension pot untouched until you need the money
- use some or all of your pot to buy a guaranteed income, also known as an annuity
- take a flexible income direct from your pot, also known as flexi-access drawdown
- take a combination of these options
- take your whole pot as cash – usually 25% will be tax free and the rest taxable
Flexi-access drawdown is a way of taking an income from your pension pot without having to buy a pension annuity. Pension freedoms introduced in April 2015 have given people more flexibility over how much they can drawdown from their pension pot from age 55. Income is taxable and can be taken on a regular or occasional basis with the rest of your pot remaining invested.
Not all pension schemes and providers offer flexi-access drawdown and those that do are likely to charge to use the facility and may have a minimum pot size requirement. You have the right to transfer your pot to another scheme or provider.
Any amount you personally pay into a pension scheme is free of income tax as long as it’s within 100% of your annual earnings, and within the annual allowance.
This is called tax relief, and the amount you are entitled to will depend on the rate of tax you pay and may also depend on which country you live in within the UK. The way this works will be set by your employer and depends on the type of scheme, as the government offers two choices:
Relief at source
This is where your employer deducts your contribution from your earnings after tax, and your pension scheme gives you back tax at the basic rate.
For example, if you have agreed to pay £100 a month (gross) into your pension, you only need to pay £80 from your take home pay.
Your scheme will then add £20 to this (using the current basic rate of income tax of 20%) bringing the total to £100.
If you pay tax at a higher rate, you'll need to claim the rest back on your self-assessment return as the scheme is not allowed to claim back more than the basic rate.
However, if you don’t pay income tax because you’re on a low income, you will still get tax relief on anything you pay up to 100% of your earnings each tax year, or £3,600 (gross) if this is more.
Under this method, your employer will take your contributions from your gross salary before any tax is paid. Because of this, you will automatically benefit from tax relief at your highest rate straight away.
If you don’t pay income tax because you’re on a low income, you can still get income tax relief on anything you pay up to 100% of your earnings each tax year, or £3,600 (gross) if this is more but this is not automatic.
Individual Savings Account (ISA)
ISAs can be bought through your bank, building society and investment managers. These savings accounts allow you to put money aside (up to £20,000 a year for the 2023/2024 tax year) and interest and investment growth you earn will be free of tax.
There are a number of types of ISA:
Your savings are held in cash, just like a bank or building society savings account. Whatever you save, you should get back some interest, but you won’t be taxed like you could be with a normal savings account.
Stocks and shares ISA
This has the same tax benefits as a cash ISA but this time you choose a fund or funds to invest in. Stocks and Shares ISAs invest in a variety of investments, including shares, bonds, and property.
The Lifetime ISA (LISA) only lets you access your money without penalty from age 60, or earlier if you are using the money saved to buy a house or are terminally ill. You can take the money out earlier than this but a 25% government charge will apply. They provide a government bonus up to a certain amount to help towards a house purchase or retirement. The LISA has different rules and limits compared to the basic ISAs, and you have to be under 40 to be eligible.
Help to buy ISA
Help to Buy ISAs closed to new applications on 30 November 2019. If you already have an account, you will be able to continue saving into it until November 2029.
Junior ISAs are long-term savings accounts for children that are converted to an adult ISA once the named child on the account turns 18. They have different rules and limits to basic ISAs.
This is a limit on the total amount of pension savings that you can build up in all your pension arrangements before you have to pay a tax charge.
For most people their Lifetime Allowance will be the Standard Lifetime Allowance. Certain circumstances may mean you have a different personal Lifetime Allowance – these are known as fixed, primary, enhanced or individual protection and you will have completed an HMRC election form if they apply to you.
If you go over the Lifetime Allowance, anything over this amount will be taxed and the rate of tax is different depending on whether you choose to take your pension income as a cash lump sum or if you get it another way for example pension payments or cash withdrawals.
If you choose to use it to provide yourself with an extra pension income, the income will be taxed at your marginal rate of income tax in addition to the Lifetime Allowance tax charge.
It is important to be aware that the Lifetime Allowance may reduce in the future, and you may be entitled to a higher Lifetime Allowance if you have received a certificate confirming this from HMRC.
Money purchase (pension) scheme
Please see Defined Contribution (Pension) Scheme.
If you take cash or income directly from your defined contribution (or money purchase) pot, other than as tax-free cash or cashing in a small pot of £10,000 or less (subject to a maximum of three small pots from personal pension schemes), your annual allowance for money purchase benefits will reduce.
This is called the MPAA, and you will also lose the ability to carry forward any unused annual allowance from previous tax years. You’ll be told if this applies to you at the time you withdraw any money from your pot.
If you have an MPAA, you will need to tell all other pension schemes where you’re still building up benefits in within 91 days from when you’re first told it applies to you. If you join any new schemes in the future, you’ll have 91 days from when you join to tell them that you have an MPAA.
Please also see Annual Allowance.
Pension Credit is an income-related benefit made up of two parts – Guarantee Credit and Savings Credit.
- Guarantee Credit tops up your weekly income if it’s below a certain level.
- Savings Credit is an extra payment for people who saved some money towards their retirement, for example a pension.
Pension credit is also a term used to refer to the pension awarded to your ex-spouse or partner (or the pension that you are awarded from your ex-spouse or partner) under a pension sharing order on divorce.
Government regulations about defined contribution pension schemes mean people have more freedom over how they can access their pension pot.
You can normally take up to 25% of your pension pot as a tax-free lump sum and with the remaining 75% you can:
- Take a lump sum which will be taxed as income or;
- Leave it invested and take regular or occasional amounts that will be taxed as income or;
- Buy an annuity. An annuity will provide you with a guaranteed income, either for life or a fixed term, which will be taxed as income.
From age 55, you can choose how and when to access your pot, including using a combination of the above options. Your pot will remain invested until it has been used up or transferred to another provider. Different providers will offer different options, features, rates of payment, terms and charges.
When you come to access your pension pot, free and impartial guidance is available to you from an independent government service called Pension Wise, part of the Money and Pensions Service.
The State Pension used to be made up of two parts – the Basic State Pension and Additional State Pension (also known as the State Second Pension or State Earnings Related Pension Scheme).
Everyone who paid enough national insurance contributions were entitled to the Basic State Pension, but the Additional State Pension was only available to people who were employed, and the amount was based on earnings. However, the government replaced this with a single flat-rate State Pension for people reaching their State Pension age on or after 6 April 2016.
The tax year runs from 6 April to 5 April of the following year.