Britons are being warned to check the level of their pension contributions to reduce the risk of “running out of money” when they retire.
Rowan Harding, from Path Financial, explained that although everyone is generally entitled to 25 percent of their pension tax-free, some caveats depending on a person’s plan could leave them with little to live off.
These can include the age they retire, whether they take a large lump sum, or if do not have enough in their pot altogether, making it imperative for people to be aware of and plan their pension savings properly.
Ms Harding said: “When you’re approaching retirement, you will have to decide when and how much of your pot you should take. This will have big ramifications in terms of what you’ll get and how long that cash will last.”
The minimum age that people can access some or all of their pension is currently 55, however, Ms Harding warned that accessing a pension too early may not be sustainable in the long term.
She said: “It takes careful planning to understand when, how and what when it comes to taking your pension. Be mindful of how much you’ve got and when the tax will apply – you do not want to run out of money.
“In most cases, you will only get 25 percent tax-free on defined contribution pensions, so anything after that is liable to income tax payments. A financial positive, though, is that you will not make further National Insurance contributions on the taxable income from your pension.”
According to Path Financial, people can get the first 25 percent of their defined contribution pension tax-free, after which they will be liable to income tax on any earned income after they’ve been paid £12,570, which is the current Personal Allowance.
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The amount of income tax people pay depends on how much income they get above the Personal Allowance. The tax rate increases when a person’s income goes over the income tax thresholds.
This means that the more money taken from a pension pot, the higher a person’s tax bill could be.
What about the state pension?
Ms Harding said: “If you also get the full state pension, you will not pay tax on that but it will count towards your Personal Allowance.”
So, those who receive income from a defined contribution pension will get the first 25 percent tax-free, after which those who get the full state pension will then pay tax on anything above £1,969. This is because the full state pension currently adds up to £10,600.
However, the way the tax works on receipt of pension income is dependent on lots of different factors, which means it is always best that people speak to an expert if they want their income to be tax efficient.
Ms Harding added: “Remember, planning now to make sure you are saving enough for your future, knowing when and how to take your pension, or if leaving the pension pot to continue growing is best for you, is always worth checking with an expert financial planner”.
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