Tax and pensions – your questions answered

There are a number of ways this could impact your income and the tax you need to pay:

• You could end up paying tax at a higher rate if your lump sum plus your existing income pushes you into a higher tax bracket.
• Any means tested state benefits you’re allowed could be reduced.
• You might not be able to save as much for future additional pension benefits.
• There will be nothing left in your fund to pass on when you die.
• You could lose any guarantees in your policy, like Guaranteed Annuity Rate (GAR) – check with your provider if you have one and how it works.
• If you take savings from your pension pot before your chosen retirement date, your fund could be reduced by a Market Value Reduction (MVR).
• You risk running out of money during retirement, for example to cover long term care needs or to support dependants. A dependant is someone who depends on you for financial support, such as a child or family member who does not work.
• You can’t change your mind.

If you have a Phoenix Life Individual Pension Policy, our tax calculator will give you an idea how much tax you’d pay if you took your full pension pot as cash.

If you cash in your pension policy the first 25% you take out is usually tax free. Your pension provider applies the level of tax you need to pay, based on HMRC rules, to the rest. The tax rules depend on the size of your pension savings and if you’ve received cash from any other savings before.

It’s important to understand the amount taken by your pension provider on behalf of HMRC won’t always be the final amount you pay. Other income that your provider isn’t aware of will affect the final amount you owe. You could have underpaid or overpaid.

You’ll need to contact HMRC directly. They’ll be able to help.

No, HMRC will automatically assess the tax applied by your pension provider as well as anything else you owe. They’ll contact you shortly after the end of the tax year to correct over or underpayments.

Yes – you can call 0300 200 3300 or fill in one of these two forms:

• Form P50Z if you have no other income except state pension. 
• Form P53Z if you have other sources of income.

We recommend that you contact Pension Wise, from the government’s MoneyHelper service. You could contact an independent financial adviser.

You have a number of options, including taking your lump sum in stages instead of in one go. Pension Wise or independent financial adviser will be able to tell you more. You’ll also find case studies on our website that show how taking your lump sum in stages could lower the amount of tax you’ll need to pay.

The first thing to remember is that you don’t have to access your savings when you reach the retirement date on your pension plan. You can keep your money where it is until you’ve decided what you’d like to do with it. Alternatively, you can: 

• Buy an annuity offering guaranteed income for life
• Get a flexible income
• Take your savings as a number of lump sums
• Take all your pension savings in one go (cashing-in)
• Choose more than one option or mix them

We would always recommend shopping around to get the right option for your needs, and speaking to an impartial expert by: 

• Contacting Pension Wise at the government’s MoneyHelper service. 

• Speaking to a financial adviser. You can find one local to you at Unbiased.

There’s also an excellent guide to shopping around on MoneyHelper. 

If you’d like further information on any or all of these options, take a look at our retirement options explained.