DURING & POST
Tax on your income
By the time you retire, you may feel you are owed some respite from the
attentions of the tax man, but the obligation to pay tax on income
sadly remains.
You may find yourself liable to income tax in
a number of different ways: the first comes if you
decide to take more than 25 per cent of your
pension pot in cash. While the first 25 per cent can
be taken tax-free, the remainder will be liable to
income tax to the extent it exceeds your
annual personal allowance (£10,600 for the
15/16 tax year). There are certain exceptions to
this rule: for example, if you only have a short
amount of time left to live, or your pension pot is
deemed trivial by HMRC.
If you then invest either the cash lump sum or
the remainder of your pension pot to generate an
income, that income is also subject to income
tax at your marginal rate. It makes no difference
whether this income has been generated from
an annuity, a drawdown portfolio, or an alternative
option such as a discretionary managed portfolio.
The only exception is where the income comes
from a tax-free wrapper such as an ISA.
You should bear in mind that you will need to include
any state pension in your income tax calculations.
Although the state pension is paid gross, it is still
taxable for anyone with additional income.
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Equally, if you continue to undertake paid work –
whether on an employed or self-employed basis – you
will need to pay income tax on your earnings.
You still have an ISA allowance after you have retired.
As all income from investments held within an ISA is
tax-free, it is therefore worth sheltering as much as
possible to reduce the amount of income liable to
tax. For the 2015/16 tax year, you can put £15,240
into an ISA.
Key points
You are taxed on your
retirement income/pension
ISA investments are not taxed in retirement
Smart budgeting can ensure you don’t
fall into a higher tax band in retirement