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Martin Lewis returned to the UK’s TV screens recently in an hour-long special of his “Martin Lewis Money Show”. In this show, he covered the basics on mortgages, pensions and credit cards but he also answered questions from viewers.
One question came in from Niraj who asked a simple question which could generate complex answers.
Niraj asked Martin: “What happens when you receive your pension? Do you pay tax?”
Martin was taken aback by the question, as he responded: “Wow, that’s a complex question!”
Despite the complexity, Martin did his best to provide insight, as he continued: “If it’s a money pot pension, you can take 25 percent of it as a tax-free lump sum and you pay tax on the rest at the tax rate you’re earning
“So, say you were working, and you were a higher rate taxpayer, but when you retire you’re only a basic rate taxpayer, there’s a tax gain.
“But, how you get that money out is really important and if you’re retiring at the moment then call the Money and Pension Service and make sure you take it out the right way or you’ll end up paying a lot more tax if you structure it wrong.”
The Government details that tax will be paid on a pension if the person’s total annual income adds up to more than their personal allowance.
There are a number of elements that go into what constitutes a person’s “total income”.
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A person’s total income could include:
- the State Pension they get (either the basic State Pension or the new State Pension)
- Additional State Pension
- a private pension (workplace or personal)
- earnings from employment or self-employment
- any taxable benefits they get
- any other income, such as money from investments, property or savings
Pension tax relief can also be granted on private pension contributions.
This relief can be worth as much as 100 percent of a person’s annual earnings.
A person will automatically get tax relief if their:
- employer takes workplace pension contributions out of their pay before deducting Income Tax
- rate of Income Tax is 20 percent – their pension provider will claim it as tax relief and add it to the pension pot (relief at source)
Pension savings in general are limited by what is known as the annual allowance.
This is a limit placed on how much money can be saved into pension pots in a tax year before tax must be paid.
As it stands, the annual allowance is £40,000 this tax year.
Full details on private pensions and tax can be found on the Government’s website and impartial guidance can be sought from the likes of Citizens Advice and the Money Advice Service.
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