Pensions - freedom, choice and danger | Tax liabilitie...

Some members have a notion of drawing out their whole pension. This may be because they want to spend it or it could be that they want to invest it outside the framework of pensions to produce an income, or simply that they want to get their money under their own control.

The basic tax rule is that 25% of the pot is tax free and the other 75% is taxable at your marginal rate of income tax at the point it is withdrawn. 

Drawing out your whole pot in one go creates a danger that you will pay a large amount of tax which means your plans are handicapped from the start. Spreading withdrawals over longer periods is likely to reduce your tax liability.

In 2015/6 the personal income tax allowance will be £10,600 and 20% tax will be payable on taxable income up to £31,785 above that. So if cashing in your pension takes your total taxable income for the year above £42,385 you will be paying 40% tax on any excess .

It has been noted that where people take this option the Government will  gain on account of receiving higher and earlier tax receipts from pension savings and that this has been a factor in the planning of this reform, which was originated in the Treasury.