When you’ve worked for years to build your pension and savings, and finally have retirement in your sights, the last thing you want to do is pay more tax than you need to. It’s surprising then, just how many people assume that their pension income – especially the State Pension – will be tax-free, but that’s simply not the case.

Research by the Pension Policy Institute (PPI) suggests people could end up paying up to 200 times more tax than necessary, depending on the choices they make in the run up to and throughout their retirement. Whether it’s using both your own and your partner’s various allowances and reliefs, taking tax-free lump sums, drawing income from ISAs, or reducing the impact of Inheritance Tax, the choices you make at retirement will make a big difference to the amount of income you and your family can enjoy.

See how we can guide you through the ever-changing legislation to optimise your income in retirement – helping to ensure you can achieve your goals and know how far your money can take you.

HM Revenue & Customs could see increased tax revenue of around £19.2 billion over the next 10 years, based on the way people have accessed their savings since pension freedoms were introduced in 2015.

* Pension Policy Institute (PPI), 2018

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Discover how to plan for a tax efficient retirement

Is my pension taxed after I die?

Pensions can be a very tax-efficient way of passing on your wealth because they allow anyone to inherit your pension – they don’t have to be your spouse or civil partner. Until recently anyone inheriting your pension fund after you died would have been subject to a whopping 55% tax charge. Today, so long as the benefits are paid within two years of the pension scheme becoming aware of your death, your fund can pass to any nominated person free of tax. Anything they then draw from this fund will be tax-free if the person passing on the fund had died before age 75, or taxed at their own income tax rate if the person passing on the fund had died after age 75.


There are various limits to this, most notably the ‘lifetime allowance’. But generally speaking, if you have pension assets that have exceeded this amount, the excess will be taxable at some point.


Irrespective of the age at which the pension holder dies, the whole fund is normally free from Inheritance Tax, even if it exceeds the lifetime allowance. Because of this, pensions play a significant role in Inheritance Tax Planning, and they need very careful integration with your wider planning.

Can I still pay into a pension and benefit from pension tax relief after I’ve retired?

Even if you’ve stopped working you can still make contributions into a pension and claim valuable tax relief of up to 45% until you reach the age of 75. There are strict allowances however, depending on your total income (which includes rental income, investment income, interest, etc.) and whether or not you are already drawing an income from your pension. Calculating your own contribution allowance can not only be difficult, but contributing too much will incur a tax charge instead of a relief.


Even then, if you can pay into your pension, whether you should will depend on your overall needs and objectives, and is a common area where Investec can give detailed and personalised advice.

Have you optimised your partner’s allowances?

If you’re married or in a civil partnership it makes sense to ensure you both utilise your personal allowances and tax bands. For instance, you can usually transfer assets between yourselves tax-free. Which means, if one of you is in a lower tax band, transferring investments or savings between you could reduce your combined tax bill.


And if one of you is a standard rate tax payer, and your spouse or civil partner isn’t, it may be possible to transfer up to £1,250 of personal allowance to the tax paying partner to set against their own liability, again reducing your overall tax bill.


Even if your partner is not earning, it may still be possible for them (or you, on their behalf) to contribute up to £3,600 pa (gross) into their pension and they will still receive tax relief of 20% on this contribution.

Will I have to pay tax on my pension?

For most people, there’s no escaping tax in retirement. But, by utilising the allowances and reliefs available, it’s possible to significantly reduce, or even eliminate, future tax charges on your retirement income. To illustrate this, we’ve created a simple example that looks at a fictional couple’s pension assets, savings and investments to create a tax-free retirement income of over £50,000 pa.


Bill and Marjorie have accumulated pension assets of £1,000,000 and other tax efficient pots of £720,000 and are both eligible for the new State Pension.


State pension £9,000
Marjorie State pension  £9,000
Bill ISA £300,000 (2% income yield)£6,000
Marjorie ISA £200,000 (2% income yield)£4,000
Bill Savings £50,000 (2% income yield) £1,000
Marjorie Savings £50,000 (2% income yield)£1,000
Bill Investments £60,000 (3.33% income yield from dividends)£2,000
Marjorie Investments £60,000 (3.33% income yield from dividends)£2,000
Bill Pension £600,000 (phased tax-free + income) £9,500
Marjorie Pension £400,000 (phased tax-free + income)£7,500
Total £51,000


State pension allowance adjusted down from £9,109 for purposes of the example (**the new State Pension for men born after 6/4/1951 and women after 6/4/1953 is £175.18 pw from April 2020).

State pension and pension income within personal allowances of £12,500.

First £1,000 of savings income is tax-free for basic rate taxpayer.

Bill ‘s Pension assumes 25% tax-free cash taken over 25 years and taxable income of £3,500.

Marjorie’s Pension assumes 25% tax-free cash taken over 25 years and taxable income of £3,500.

Investment income within £2,000 dividend allowance, capital within CGT allowance.

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Grant, Scotland (name changed to protect anonymity)

Having recently retired, we were provided with excellent pension advice as well as being able to give us confidence in our financial position for the future.

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Investec Wealth & Investment (UK) is a trading name of Investec Wealth & Investment Limited which is a subsidiary of Rathbones Group Plc. Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is registered in England. Registered No. 2122340. Registered Office: 30 Gresham Street. London. EC2V 7QN.