Tax on private pensions while working

[SupremeCommanderServalan]

Hi would appreciate some pointers on this please.

I'm due to turn 60 in 2024, at which point I aim to start taking pensions from three previous employers. I've done the rough maths, and think I can drop my hours at my current job. However, the stumbling block is that I hadn't allowed for the pensions to be taxed.

Is there a ready reckoner I can use to work out what on earth my options will be? Or is it as simple as 40p for every £?

I would assume it is income based, so you have a tax free band, a lower rate tax band, then move to the 40% tax band.

How much will (a) the pensions and (b) earnings be?

I'm in a similar position in that I receive a Civil Service pension of around £27k gross and still work earning around £16k.

My tax free allowance is set against the pension and my earnings are taxed at basic rate - tax code BR.

I could do it the other way round but the pension is there for life and I could lose the job at any time.

If, collectively, pension and earnings take you into 40% tax then codes etc will be adjusted accordingly.

Your tax and banding are determined by your total income from your job and all pensions. I have a pension from a previous job that I was due to take at 60, but I chose to defer it. You could defer yours unless you really want to go part time.

As above, the pension is just added to your employment income and the whole amount is taxed in the usual way, so if your employment income puts you into 20% tax the pension will be taxed at 20% up to the next tax band, then the bit over will be taxed at 40%, etc.

At the moment, the first £12570 of your income is tax free, after that you pay 20% on everything earned up to £50270. Plus NI contributions.

Suggest strongly that you consult an independent financial advisor as if you don't know about these tax bands, you need some help with working out what is best for you.

Pension income is taxed same way as employment income (except for national insurance), so yes if you are already in the 40% rate then it’s most likely it will just be a straight 40% tax.

If you go into other tax bands, higher or lower, then that proportion of income will be taxed at that rate.

Usually tax on pensions is collected each month, the same as PAYE

Perhaps you could defer one or more of the pensions (or take a tax free lump sum maybe?) if you don’t necessarily need the income now. It’s definitely worth speaking to a pensions adviser about it.

You don’t pay NI on income from pensions so bear that in mind

Also 25% of your pension draw down is tax free, whether as a lump sum or as regular amounts.

It might work for you to take a lump sum tax free, put it in high interest savings accounts to use year by year until you take your state pension and full pension. Bear in mind that depending on your overall income you can get an additional £1k allowance for earnings from savings interest, but beyond that it is taxed. ISA interest and Premium Bond winnings are not taxed so you could make careful use of those.

But if you use up the 25% tax free allowance in your pension in a lump sum you will be taxed in future years, when the state pension uses up a big portion of your personal allowance.

Flexi access drawdown may not be available in OP’s scheme - sounds like defined benefit.

Thanks everyone. I think I need to get all my paperwork together and see a financial advisor in the new year.

Sounds like a good idea