In this example, Sam is a 65 year old member who has a pension fund of £35,000 and wishes to take his whole pension fund as cash. Sam has no other income other than his state pension. The first 25% of his fund is paid to him tax-free, the table below shows how the remaining 75% would be taxed. In this circumstance, Sam pays £4,503.44 in tax and receives £30,496.56 in cash from his total fund of £35,000.
In the next example Sam has chosen to take out his pension fund over a nine year period. By doing so, he will not get taxed (assuming his personal tax allowance remains the same).
Every member is able to receive an income of up to £12,500 each year, which is not taxable. This means (assuming no changes to the personal allowance or tax thresholds) that if the same member takes seven payments of £3,732.80 and one payment of £120.40 over eight years (in addition to their 25% tax free cash) that they would not have any tax to pay. This is because the state pension of £8,767.20 plus a cash payment of £3,732.80 from their fund would be equal to the Personal Allowance.
Example 2 – Larger Pension Funds
If the total taxable income after deduction of the Personal Allowance is larger than £37,500 a year, then any income over this is taxed at 40%. If a member had a total fund of £100,000, they would pay £21,006.88 in tax and receive £78,993.12 in cash from their total fund of £100,000; if they choose to draw it all immediately on retirement. Before drawing your pension fund as cash, your own circumstances should be considered and guidance should be sought.
If the member chooses to take out their pension fund below the 40% higher rate tax threshold, they will not pay income tax on their pension fund income as shown in the below table.
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