You won’t usually pay any tax if your total annual income adds up to less than your Personal Allowance.
Lump sums from your pension
You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. This is limited to a maximum of 25% of your available lifetime allowance. For most individuals, the standard lifetime allowance applies. This is currently £1,073,100.
If you hold lifetime allowance protection, this may increase the amount of tax-free lump sum you can take from your pensions.
The tax-free lump sum doesn’t affect your Personal Allowance.
Tax is taken off the remaining amount before you get it.
Example:
Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider takes tax off the remaining £45,000.
When you can take your pension depends on your pension’s rules. It’s usually 55 at the earliest.
You might have to pay Income Tax at a higher rate if you take a large amount from your pension. You could also owe extra tax at the end of the tax year.
How you can take your pension
A pension worth up to £10,000
You can usually take any pension worth up to £10,000 in one go. This is called a ‘small pot’ lump sum. If you take this option, 25% is tax-free.
You can usually get:
- up to 3 small pot lump sums from different personal pensions
- unlimited small pot lump sums from different workplace pensions
A pension worth up to £30,000 that includes a defined benefit pension
If you have £30,000 or less in all of your private pensions, you can usually take everything you have in your defined benefit pension or defined contribution pension as a ‘trivial commutation’ lump sum. If you take this option, 25% is tax-free.
If this lump sum is paid from more than one pension, you must:
- have your savings in each scheme valued by the provider on the same day, no more than 3 months before you get the first payment
- get all payments within 12 months of the first payment
If you take payments from a pension before taking the rest as a lump sum, you pay tax on the whole lump sum.
Cash from a defined contribution pension
Check with your provider about how you can take money from a defined contribution pension. You can take:
- all the money built up in your pension as cash
- smaller cash sums from your pension
You can take up to 25% from your pension free of tax. This is limited to a maximum of 25% of the standard lifetime allowance. This allowance is currently £1,073,100.
You may have to pay a tax charge on money you put into your pension after you withdraw cash.
If your life expectancy is less than a year
You may be able to take all the money in your pension as a tax-free lump sum, if all of the following apply:
- you’re expected to live less than a year because of serious illness
- you’re under 75
- you don’t have more than the lifetime allowance of £1,073,100 in pension savings
You’ll pay Income Tax on some or all of the lump sum if:
Check with your pension provider. Some pension funds will keep at least 50% of your pension for your spouse or civil partner.
FAQs
Taxes on Pension Income
When you receive a pension is it taxed? ›
Most pension payments are taxable, and the amount of tax withheld depends on your total income for the year and the income tax withholding election you make.
At what age do you stop paying taxes on your pension? ›
Taxes aren't determined by age, so you will never age out of paying taxes.
Which state doesn't tax pensions? ›
The following 15 states do not tax pension income that retirees receive:
- Alabama.
- Alaska.
- Florida.
- Hawaii.
- Illinois.
- Iowa.
- Mississippi.
- Nevada.
Windfall elimination provision
The WEP may apply if you receive both a pension and Social Security benefits. In that case, the WEP can reduce your Social Security payments by up to 50% of your pension amount.
How much federal tax is taken out of a pension check? ›
A payer must withhold 20% of an eligible rollover distribution unless the payee elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. In the case of a payee who does not elect such a direct rollover, the payee cannot elect no withholding for the distribution.
Do pensions count as earned income? ›
Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits. For tax years after 2003, members of the military who receive excludable combat zone compensation may elect to include it in earned income.
Can I collect a pension and Social Security? ›
You can retire with Social Security and a pension at the same time, but the Social Security Administration (SSA) might reduce your Social Security benefit if your pension is from a job at which you did not pay Social Security taxes on your wages. There are two different kinds of pensions: covered and noncovered.
Do you have to file taxes on Social Security and pension if you? ›
You will pay federal income taxes on your benefits if your combined income (50% of your benefit amount plus any other earned income) exceeds $25,000/year filing individually or $32,000/year filing jointly. You can pay the IRS directly or have taxes withheld from your payment.
What is the federal tax rate on retirement income? ›
Federal and state income taxes remain
| Tax rate | Single filers | Married filing jointly |
|---|
| 12% | $11,600 to $47,150 | $23,200 to $94,300 |
| 22% | $47,150 to $100,525 | $94,300 to $201,050 |
| 24% | $100,525 to $191,950 | $201,050 to $383,900 |
| 32% | $191,950 to $243,725 | $383,900 to $487,450 |
3 more rowsYes, Social Security is taxed federally after the age of 70. If you get a Social Security check, it will always be part of your taxable income, regardless of your age. There is some variation at the state level, though, so make sure to check the laws for the state where you live.
What retirement income is not taxable? ›
For example, life insurance proceeds, long-term care insurance payments, disability benefits, muni bond interest, and alimony and child support are generally not taxable. Additionally, earned income in states with no income tax isn't subject to tax at the state level.
What state is most tax-friendly for retirees? ›
Nevada. Nevada is considered to be very tax-friendly toward retirees. Nevada has no state income tax, meaning that withdrawals from retirement accounts are not subject to state income taxes. There are no state income taxes on Social Security benefits as well.
Do I have to report my pension to Social Security? ›
Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes. You may need to pay income tax, but you do not pay Social Security taxes.
How do I get the $16728 Social Security bonus? ›
Have you heard about the Social Security $16,728 yearly bonus? There's really no “bonus” that retirees can collect. The Social Security Administration (SSA) uses a specific formula based on your lifetime earnings to determine your benefit amount.
When my husband dies, do I get his Social Security and mine? ›
In many cases, a surviving spouse can begin receiving 1 benefit at a reduced rate and allow the other benefit amount to increase. If you will also receive a pension based on work not covered by Social Security, such as government or foreign work, your Social Security benefits as a survivor may be affected.
How much money can a retired person make and not pay taxes? ›
How Is Social Security Taxed in Retirement?
| Combined Income | Taxable Portion of Social Security |
|---|
| $0 to $24,999 | No tax |
| $25,000 to $34,000 | Up to 50% of SS may be taxable |
| More than $34,000 | Up to 85% of SS may be taxable |
| Married, Joint Return | |
8 more rowsWhat Happens to Your Pension When You Leave a Job? Exiting a job ushers in two primary possibilities for your pension: Receiving a lump-sum payout or keeping the money in the current plan. Keep in mind that you may not have an option depending on the terms of your plan.
