Are career average pensions taxed?

[ImSuchABigIdiot]

I’ve had a Google and can’t find a clear answer for this - please could you all help?

If you have a ‘career average’ pension, where your pensionable earnings are averaged out over the course of your career, your employer commits to paying you a pension that equates to an annual income for the rest of your life.

What I’m confused about is if you pay tax on the ‘annual income’. Do you have to or not?

Pensions are taxed when you draw them. They will often have a tax free lump sum at the start

Yes. With pensions you get tax relief when you save, but pay income tax - just like you you would on any income - when they pay out (although you don’t currently pay NI once you’ve passed the state pension age).

All pension income is taxable, although if you only have a state pension you will be under the tax threshold. You won't pay NI on it though.

As career average pensions are paid out as an annual income, how would the income tax rate be calculated? Would it be calculated based on the amount paid out each year?

It depends which scheme you're in but you normally have the option to take 25% as a lump sum tax free.

It doesn’t matter what type of pension you have - DC or DB Final Salary or DB Career Average.
Once you come to draw it, it’s just income - so yes, it’s taxable exactly the same as other income.

As PP said, you’ll usually be entitled to draw 25% as a lump sum tax free.

What isn’t taxable, is the capital gain that you make (hopefully!) whilst it’s in the pension wrapper. So you could have a whacking big rise in the value due to a rising stock market and pay no tax on that it. Only when you draw it and you draw more than your personal allowance, do you pay income tax.

You need to think about your pension as though it is income from a job. You pay tax at your marginal income tax rate when you are working, and you will pay it at your marginal income tax rate when you are receiving your pension.

It is an annual amount, but paid monthly, like a salary. Tax is taken at source. Depending on how much it is, you may need to pay more as you state pension and other income may take you over a tax band.

When you receive your pension you will be taxed on that pension, subject to annual allowances etc. You will be taxed on the amount that you receive. Is that clear?

This all makes sense now, thanks.