Benefit Crystallisation – What to consider

We aim to help you understand what options are available to you when looking to release funds from your existing pension arrangements.

Tax Considerations

When you receive benefits from your pension you pay tax on income above your tax-free Personal Allowance, just like you do on your salary. The only difference is that you can also take part of your pension pot tax-free. This money doesn’t use up any of your Personal Allowance.
How much tax you pay depends on your total income and the tax rate that applies to you.
Your taxable income may include:
  • Any money you get from your pension pot, e.g. as an annuity or cash
  • The State Pension
  • Earnings from employment or self-employment
  • Any other income, e.g. money from rental income, savings, investments
  • Any taxable benefits you might get, e.g. Carer’s Allowance
 If you leave your pension pot untouched and don’t take any money out, you don’t pay Income Tax on it. What’s tax free
You can usually take part of your pension pot as a tax-free lump sum. Most pensions offer this.
There are 2 ways you can take your tax-free lump sum.

Take your lump sum in one go

You can take 25% of your whole pension pot tax free. If you do this, you can’t leave the remaining 75% untouched. You must either take it as cash, or buy an annuity with it, or put it into a flexi-access drawdown fund.
Any payments you get from the remaining 75% are taxable.
Example
Your pot is £60,000 and you take £15,000 tax-free in one go. You buy an annuity with the remaining £45,000 which pays you £2,000 a year. This money would be taxable.

Take smaller sums

You can take smaller cash sums from your pension pot – 25% of each sum would be tax-free.
Example
Your pot is £60,000 and you take £1,000 every month. £250 of this amount would be tax-free every time. The remaining £750 would be taxable.

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