Retirement and tax
Tax does not stop at retirement
Tax does not disappear once you start the retirement process. While your income is likely to fall when you cease work completely, you will still have an income tax liability if your pension and other income exceed your available allowances.
As the personal allowance is £11,850 – there are no longer any age-related personal allowances – it does not take much income over and above the state pension (currently a maximum of £8,546 in its single-tier state pension guise) to bring you into the tax net.
In some respects, tax can become more complex in retirement than when you are in work. Before retirement normally only one source of earnings is taxed, whereas in retirement you may receive pensions from several different sources, including the state, former employers’ pension schemes and personal pensions. To complicate matters, not all pension income is taxed in the same way.
In recent years there have been radical reforms to the tax rules for many pension arrangements. This has created greater flexibility and choice for planning income tax in pensions. However, the downside to this is that the complexity of pension tax has increased. The reforms also overhauled the tax treatment of some pension death benefits, a change which could be helpful if you are concerned about estate planning and inheritance tax (IHT).
This guide looks at the basic treatment of lump sums, income payments and death benefits from the main types of pension arrangement. It is by no means the complete picture and you should seek professional advice if you have any questions about your personal situation.