Can I Take 25 of My Pension Tax Free Every Year

When you reach retirement age, you may be wondering how much of your pension you can withdraw tax-free each year. The good news is that you can take up to 25% of your pension pot as a tax-free lump sum. This means that if your pension pot is worth £100,000, you can withdraw £25,000 without paying any tax. However, it’s important to note that the rest of your pension withdrawals will be subject to income tax. So, if you withdraw £10,000 from your pension pot in a tax year, you will have to pay income tax on this amount.

Pension Tax-Free Lump Sum

When you reach retirement age, you can take a tax-free lump sum from your pension. This is called a pension tax-free lump sum.

The amount of tax-free lump sum you can take depends on your age and the value of your pension pot. The maximum amount you can take is 25% of your pension pot.

You can take your tax-free lump sum all at once or in smaller amounts over time. If you take your tax-free lump sum all at once, you will pay income tax on the rest of your pension pot.

If you take your tax-free lump sum in smaller amounts, you will not have to pay income tax on the money you take out.

Here are the key things to remember about taking a pension tax-free lump sum:

The maximum amount you can take is 25% of your pension pot.
You can take your tax-free lump sum all at once or in smaller amounts over time.
If you take your tax-free lump sum all at once, you will pay income tax on the rest of your pension pot.
If you take your tax-free lump sum in smaller amounts, you will not have to pay income tax on the money you take out.

The following table shows the maximum tax-free lump sum you can take from your pension pot at different ages:

Age

Maximum Tax-Free Lump Sum

25% of pension pot

Annual Pension Allowance Explained

The annual pension allowance is the maximum amount of money you can contribute to a pension scheme every year without paying tax on it. The standard annual allowance is £40,000 for the 2023/24 tax year. However, there are some circumstances where you may be able to contribute more, such as if you have unused allowances from previous years.

The annual pension allowance is divided into two parts:

The main allowance: This is the maximum amount you can contribute from your salary before tax is deducted.
The additional allowance: This is a top-up allowance that can be used to make up for any unused main allowance from previous years.

The additional allowance is currently £4,000 for all taxpayers. However, it is due to be reduced to £3,600 for the 2024/25 tax year. This means that the maximum amount you can contribute to a pension scheme every year from April 2024 will be £43,600.

There are a number of things to bear in mind when contributing to a pension scheme:

You can only contribute to a registered pension scheme.
You must be under the age of 75 to contribute to a pension scheme.
You can’t contribute more than your annual allowance.
If you contribute more than your annual allowance, you will be taxed on the excess.

If you are unsure how much you can contribute to a pension scheme, you should speak to a financial adviser.

Tax year	Main allowance	Additional allowance	Total allowance
2023/24	£40,000	£4,000	£44,000
2024/25	£40,000	£3,600	£43,600

Tax Implications of Pension Withdrawals

Pension withdrawals are subject to various tax implications depending on the type of pension plan and the age of the individual making the withdrawal.

Regular Pension Plans

Withdrawals before age 59½ are subject to a 10% early withdrawal tax penalty, in addition to income tax.
Withdrawals after age 59½ are subject to income tax at the ordinary income tax rate.

Roth Pension Plans

Qualified distributions (i.e., made after age 59½ and after the account has been open for at least 5 years) are tax-free.
Non-qualified distributions (i.e., made before age 59½ or before the account has been open for at least 5 years) are subject to income tax and the 10% early withdrawal tax penalty.

Tax-Deferred Pensions

Withdrawals from tax-deferred pensions are taxed as ordinary income.
Withdrawals are also subject to the 10% early withdrawal tax penalty if made before age 59½.

Required Minimum Distributions (RMDs)

Individuals who reach age 72 must begin taking RMDs from their retirement accounts.
RMDs are subject to income tax at the ordinary income tax rate.

Tax Withholding on Pension Withdrawals

Federal income tax is withheld from pension withdrawals unless the individual elects otherwise.
The amount of withholding is determined based on the individual’s withholding preferences and the amount of their pension payment.

Tax-Free Withdrawals from 401(k) Plans

Participants in 401(k) plans can take tax-free withdrawals for qualified expenses, such as medical expenses, education expenses, and a first-time home purchase.
The maximum amount that can be withdrawn tax-free varies depending on the expense category.

Tax Implications of Pension Withdrawals
Type of Pension	Age of Withdrawal	Tax Implications
Regular Pension	Before 59½	10% early withdrawal tax penalty + income tax
Regular Pension	After 59½	Income tax
Roth Pension	Qualified distributions	Tax-free
Roth Pension	Non-qualified distributions	Income tax + 10% early withdrawal tax penalty
Tax-Deferred Pension	Before 59½	Income tax + 10% early withdrawal tax penalty
Tax-Deferred Pension	After 59½	Income tax

Lifetime Allowance for Pension Savings

In the United Kingdom, you have a Lifetime Allowance (LTA) for pension savings. This is the maximum amount you can save in your pension during your lifetime while benefiting from tax relief. The LTA is currently set at £1,073,100 for the 2022/23 tax year.

If you exceed the LTA, you may have to pay a tax charge on the excess amount. This tax charge is known as the Lifetime Allowance Charge.

What does this mean for me?

It means that you need to be aware of the LTA and make sure that you do not exceed it. If you are unsure whether or not you are on track to exceed the LTA, you should seek advice from a financial adviser.

What happens if I exceed the LTA?

If you exceed the LTA, you will have to pay a Lifetime Allowance Charge on the excess amount. The tax charge is calculated as follows:

* 55% if you take the excess amount as a lump sum
* 25% if you take the excess amount as income

How can I avoid exceeding the LTA?

There are a number of ways to avoid exceeding the LTA, including:

Making smaller contributions to your pension.
Investing outside of a pension, such as in an Individual Savings Account (ISA).
Taking some of your pension savings as a lump sum before you reach the LTA.
Using tax-efficient investments, such as Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EISs).

What if I have already exceeded the LTA?

If you have already exceeded the LTA, you may want to consider:

Reducing your pension contributions.
Taking some of your pension savings as a lump sum.
Using tax-efficient investments.

Tax Relief	Lifetime Allowance Charge
55%	If you take the excess amount as a lump sum
25%	If you take the excess amount as income

Well, there you have it! Now you know whether or not you can take 25% of your pension tax-free every year. I hope this article has been helpful. If you have any other questions about pensions, be sure to check out our other articles or give us a call. Thanks for reading!