Pensions, for the most part, will allow the pension holders to withdraw a chunk of cash from their pots without any tax penalty.
Up to 25 percent of a pension pot can be withdrawn before any tax is due.
This tax-free amount doesn’t use up any of the holders personal allowance, which is the amount of income a person can receive before income tax is due.
Currently the standard personal allowance is £12,500 but any tax due outside of these parameters is based on a person’s income levels.
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Pension Wise currently provide a guide on what pension options are available for people and how they’ll be taxed.
The first is the most straight forward: leaving the pot untouched. A person is never obligated to start taking money from a pension pot even if they hit retirement age.
They are free to leave the pot untouched which will hopefully allow it to grow over time.
Any money that remains inside a pension pot that isn’t touched or withdrawn will not face a tax charge. On top of this, any money that is left in a pension pos can be passed onto free if the holder dies before the age of 75.
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There are multiple options for pension withdrawals but there will be tax due (Image: GETTY)
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The next option is guaranteed income in the form of an annuity. Money within a pension pot can be used to buy an insurance policy that gives the holder a guaranteed income for the future.
The fixed income from this annuity will last for either a set number of years or until the holder dies.
Pension Wise detail that for people who want to purchase an annuity, the best option is to take 25 percent of a pension pot as tax free cash and then buy an annuity with the remaining 75 percent.
However, it should be noted that annuity income will be taxed and there are multiple types of annuities with different rules.
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Pensioners can also receive their pension income in adjustable terms, which is often referred to as “Flexi-access drawdown”.
This option will require a fair degree of input from the retiree. In this case, the same 25 percent can be taken tax free but the remaining 75 percent is invested to provide taxable income.
The retiree themselves will decide on the amount of income they receive as well as when they take it. The person here will likely be involved in choosing how the pension pot is managed.
Not all pension providers offer this option but if it is the route a person wants to utilise they can transfer their pots to another provider who can.
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Cash can also be taken from pension pots in small quantities until the entire pot runs out.
If this option is taken the 25 percent tax free amount isn’t paid in one lump sum – it is paid over time.
Within the individual smaller chunks, 25 percent is tax fee and the remaining amount is taxable.
This is another option that not all pension companies provide but transfers are still possible.
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It is also possible to take the whole pension in one go which is another straight forward option.Here the calculation is simple, of the whole pension pot, the first 25 percent is tax free and the remaining 75 is taxed.
This is a simple option but Pension Wise warn that thought should be given before any actions are taken.Taking any large sum of cash from a pension pot, which in this case would be the whole amount, could trigger a higher tax bill. The final option detailed will likely be the most complex for many.
Pension Wise detail that it is possible to mix all of these options together. An example of how this could work in practice includes a person using some of their pot to get an adjustable income and some of it to buy an annuity.
If a combination of choices is used, the tax bill calculation could easily become complicated. It is advisable to seek financial advice in these circumstances and an appointment can be booked in with Pension Wide to evaluate the best options.