What Taxes Do You Need to Pay In Retirement?

Retirement doesn’t release you from taxes. The general rule when it comes to taxes during retirement is that you still pay your Income Tax. This covers every source of income, including the following:

The amount of Income Tax you have to pay is based on your total annual income and its corresponding tax rate. When you reach the State Pension age, you do not have to make National Insurance contributions.

There is, however, an exception to paying Income Tax upon retirement—that is, if your total annual income is below the standard Personal Allowance. The Personal Allowance for the 2019-20 tax year is £12,500.

You do not have to pay taxes on your total income up to your Personal Allowance. This means for the current tax year, the first £12,500 you make in your annual income is tax-free.

How Your Pension Is Taxed

Whenever you take money from your pension, you have to pay Income Tax on 75% of the total amount. The remaining 25% is tax-free. Note that this 25% is separate from your Personal Allowance.

You can usually get the 25% tax-free portion of your pension as a lump sum payment. If you get this 25% as a lump sum, you have to do the following with the remaining 75%:

Getting Your Pension Money

There are different ways for you to get money from your pension, and the 75%-25% split is applied according to the method you choose.

  • Cash taken in chunks — 75% is taxed each time cash is taken. The 25% that is tax-free is given to you over time.

  • Entire pension taken in one go — 75% is taxed on the whole pot. The remaining 25% is tax-free.

  • Guaranteed income (annuity) — You can get 25% of your pension as tax-free cash, then use the 75% to buy an annuity, which you have to pay Income Tax on.

  • Adjustable income — You can get 25% of your pension as tax-free cash, then use the 75% to invest in a regular, taxable income. You can adjust how much you get and when you get it.

You can choose to mix your options, such as buying an annuity and also getting adjustable income. If you have multiple pension pots, you can have different methods of taking money for each pot.

Your pension provider takes off the tax you owe whenever you take money from the pension and pays HMRC. This includes the tax due on your State Pension. Meanwhile, you have to pay Income Tax on other forms of income yourself, such as money made from investments and property rentals.

Your Taxes If You Choose to Continue Working

When you reach the age of retirement but still choose to work, you will continue to pay Income Tax on your earnings from your job. Your employer is responsible for taking the tax you owe from your earnings and your State Pension through the PAYE (Pay As You Earn) scheme.

If your total income for the tax year is £100,000 or more, or you are self-employed, you have to file a Self-Assessment tax return.

Lifetime Allowance

If your pension pot is above the lifetime allowance, you have to pay additional tax when you take money from that pot. This is in addition to the Income Tax.

The tax rate is 55% when you get it lump sum and 25% any other way, such as pension payments or cash withdrawals.

The current lifetime allowance is £1,055,000.

Retiring Abroad

You need to tell HMRC if you are leaving the UK to live abroad permanently with a P85 form. You also need to submit to HMRC parts 2 and 3 of your P45 form or your Self-Assessment tax return.

Remember that you still have to pay UK Income Tax on your pension except for your State Pension if you are not a resident.

Depending on the taxation agreement between the UK and the country you are moving to, you might also be taxed by the country you move to on your UK income. The UK has double taxation treaties with certain countries, allowing for partial and full tax reliefs or refunds.

State Pension

If you have made enough UK National Insurance contributions, you can claim your State Pension when you live abroad. If you live abroad for only part of a year, you must choose one country where you want your pension to be paid in. You will get your pension in the local currency following the exchange rate.

You have the option to get your pension every 4 or 13 weeks. If it is under £5 a week, you will get it annually in December. You can get your pension through a bank in the country you will be living in or a bank or building society in the UK.

You can use an account in your name, a joint account, or another person’s account as long as you have their permission and respect the terms of the account.

For foreign bank accounts, you need the international bank account number (IBAN) and bank identification code (BIC).

Other Pensions

If you have a defined contribution pension, you can take it from the country you will retire in under the same methods as if you were living in the UK. You can also have the pension moved to the country you will retire in.

Pension providers generally don’t send money directly to overseas bank accounts. Those that do tend to charge extra. To avoid such charges, you can ask them to pay through a UK bank account, and you can make a withdrawal or transfer.

If you decide to move your pension abroad, transfer it to a qualifying recognised overseas pension scheme (QROPS) to avoid additional tax charges. Use form APSS263for this.

1. QROPS in a European Economic Area (EEA)

If you live outside the EEA or move to live outside the EEA within 5 years, you pay 25% tax. You don’t pay tax otherwise.

If you move to a country in the EEA within 5 years, you can claim a tax refund using form APSS241.

2. QROPS outside the EEA

If you live in the country your QROPS is based in, you don’t pay tax. You pay 25% tax otherwise.

You have to submit form APSS241 if you move countries within 5 years of transferring your pension scheme. Take note of the following requirements:

  • If you moved to the country your QROPS is based in, you get a tax refund
  • If you moved away from the country your QROPS is based in, you have to pay 25% tax on your pension transfer

Claiming Tax Refunds

If you find out you paid more tax on your pension than you ought to, you can get help with the UK Government website’s tax claim refund service.

Figuring out your taxes can be daunting, especially if you just want to enjoy your retirement years. Get in touch with our accountants to make this complicated process much easier for you.