Category: Pension

Pension tax-free lump sums

Turning 55 soon? From April 2028, the minimum pension access age rises to 57. If you are planning to draw your pension, you could take up to 25% tax-free. Make informed choices about your remaining pot, as the rest will usually be taxed as income. Get advice before you act.

Most personal pensions have a minimum age for access, currently set at 55 (this will increase to 57 from 6 April 2028). When you reach this age, you can begin withdrawing from your pension, and some of the benefits can be taken tax-free.

In most cases, you’re entitled to take 25% of your pension pot as a tax-free lump sum, up to a maximum of £268,275. If you have protected allowances, you may be able to take a larger tax-free amount.

In specific circumstances, such as serious illness or where certain lump sum death benefits are paid to your beneficiaries, you or your beneficiaries may be eligible to take up to £1,073,100 tax-free. This is referred to as the Lump Sum and Death Benefit Allowance.

Once you’ve taken your tax-free lump sum, you generally have up to six months to decide how to access the remaining 75%, which is usually taxable. Your options include taking further cash withdrawals, buying an annuity for guaranteed income for life and using flexi-access drawdown to invest and withdraw flexibly.

It’s important to remember that pension income (beyond any tax-free amounts) is treated as earned income and taxed under standard Income Tax rules. This includes income from your personal pension, State Pension, employment, or other taxable sources.

Higher rate tax relief on pension contributions

Want to make the most of your pension savings? You could claim up to 45% tax relief on contributions, plus carry forward unused allowances. Here’s how to boost your retirement pot with generous HMRC incentives.

Tax relief on private pension contributions is generally available up to 100% of your annual earnings, subject to specific limitations. The relief is applied at your highest rate of Income Tax, which means:

• Basic rate taxpayers are eligible for a 20% pension tax relief.
• Higher rate taxpayers can claim a 40% pension tax relief.
• Additional rate taxpayers are entitled to 45% pension tax relief.

For individuals paying the basic income tax rate, the initial 20% pension tax relief is typically applied automatically by their employer.

Higher and additional rate taxpayers can claim the additional relief through their self-assessment tax return as follows:

• An additional 20% relief on income taxed at 40%
• An additional 25% relief on income taxed at 45%

Alternatively, if taxpayers are subject to 40% income tax and do not submit a self-assessment return, they may contact HMRC directly to request the relief.

These tax relief rates apply to taxpayers in England, Wales, and Northern Ireland. It is important to note that Scotland has some regional variations for Income Tax rates.

Furthermore, there is an annual allowance of £60,000 for pension tax relief. Taxpayers have the opportunity to carry forward any unused portion of this allowance from the previous three tax years, provided they made pension contributions during those years. As of 6 April 2023, the lifetime limit for pension tax relief was abolished, offering greater flexibility in pension contributions without the previous lifetime cap.

Inheriting spouse’s State Pension

If your spouse or civil partner has passed away, you may inherit part of their State Pension, depending on when you reached pension age. Find out what you could claim, from basic pension boosts to deferred benefits and top-ups.

If you reached State Pension age before 6 April 2016, you might be able to inherit some of your spouse or civil partner’s State Pension when they pass away.

To find out what you are entitled to, contact the Pension Service.

If you are not already receiving the full State Pension of £169.50 a week (increasing to £176.45 from 6 April 2025), you may be able to boost your basic State Pension by using their qualifying years.

You might also be able to inherit part of their Additional State Pension or Graduated Retirement Benefit.

If You Reached State Pension Age After 6 April 2016

If you reached State Pension age on or after 6 April 2016, different rules apply to you. You can check what you could inherit based on your spouse’s or civil partner’s National Insurance contributions.

If Your Spouse or Civil Partner Deferred Their State Pension

If your spouse or civil partner deferred their State Pension and built up extra benefits, you could claim this additional amount or receive a lump sum—provided you have not remarried or entered into a new civil partnership.

If they deferred for less than 12 months, you could only receive the extra State Pension, not a lump sum.

You can only claim this extra amount once you have reached your State Pension age.

State Pension Top-Up

If your spouse or civil partner topped up their State Pension between 12 October 2015 and 5 April 2017, you might be able to inherit some or all of the top-up.

Tax on inherited private pension pots

Private pensions can be a great way to pass on wealth, but tax implications depend on the age of the deceased and the type of pension. Some beneficiaries may receive funds tax-free, while others could face significant tax charges. Knowing the rules is essential.

Private pensions can be an effective means of passing on wealth, but it is crucial to consider the potential tax implications when inheriting a private pension. Typically, the individual who passed away will have nominated the beneficiary by informing their pension provider of their wish for the remaining funds in the pension pot to be inherited by you. If the nominated beneficiary cannot be located or has since passed away, the pension provider may make alternative arrangements and direct the funds to someone else.

In general, if you inherit a private pension from someone who died before the age of 75, the benefits remaining in the pension can be paid out as a lump sum or drawdown income without any tax liability. However, if the pension holder passed away after the age of 75, the inherited pension will be subject to taxation at your marginal income tax rate. This means you would pay 20% tax if you are a basic rate taxpayer, 40% if you are in the higher tax bracket, or 45% if you are taxed at the top rate. Note that tax rates may differ for Scottish taxpayers.

For pensions from a defined benefit scheme, typically associated with workplace pensions, there are additional restrictions. In most cases, the pension can only be paid to a dependant of the deceased, such as a spouse, civil partner, or a child under the age of 23. If the pension scheme permits, this rule may be adjusted, but any inheritance under such circumstances may be subject to a tax charge of up to 55% as an unauthorised payment.

The rules governing pension inheritance are complex, varying depending on the type of pension and the age of the deceased at the time of death. Furthermore, there are strict time limits that must be adhered to in order to ensure compliance.