Taxing times: the pension tax guide

Hello, and welcome to our latest webinar, Taxing Times, the Pensions Tax Guide. I'm Sarah Pennells and I'm the consumer finance specialist here at Royal London.

Hi, I'm Clare Moffat, and I'm Royal London's pensions and tax expert. We know from your questions and feedback that pensions tax is one of the most confusing and important topics when thinking about saving for and planning your retirement.

Well, absolutely and we've had over 500 questions sent to us in advance and we'll be answering some of the most popular ones in the next 45 minutes or so. But, if you'd like to ask a question as we go through, we have left plenty of time at the end to answer them and we would love to hear from you. But, as with all our webinars, we can't answer a question that's about your specific circumstances, or a Royal London policy. If you'd like to leave a comment or ask a question, you can do so via the Slido link. Now, before we go any further, just a couple of housekeeping points. We are recording this webinar and we will share a link to the recording afterwards with everyone who registered for it. Now, if during the webinar the streaming freezes, please refresh your page and that should get rid of the gremlins. Now, I want to say at the outset that we are going to be covering some quite technical areas. There will be some jargon, it is pensions after all, but we will explain it all as we go along. And, there will also be a fair amount of figures, but we've covering pensions and tax in more detail because we get so many questions about it in each webinar we do. But, if you don't understand something as we go along, do ask a question about it and we will be happy to explain more.

So, let's start with what we'll cover today. Today, we'll break down how your pension is taxed, both when you're building up your pension pot and when you start to take money out. We're focusing on defined contribution pensions, sometimes called Money Purchase Pensions. That's where you, and/or your employer build up a pot of money to use in retirement. We won't be covering defined benefit pensions like final salary schemes, but if you have questions about those let us know and we can point you to more information. When it comes to tax and pensions, then a good starting point is to look at the tax benefits of paying into a pension. And that's through tax relief, so Clare can you explain how that works?

Of course, now we talk about this in nearly every webinar we do. And that's because it's important, and we know that people often don't understand how it works. In 2023 we surveyed 4,000 adults in the UK and found that over a third of those who have a pension, 36% didn't know that they get tax relief on their pension contributions. When you pay into your pension, some of the money that would've gone to the government as tax, goes into your pension instead. For example, if you're a basic rate tax payer and you pay £80 into your pension, the government tops it up by £20, so £100 goes into your pension. That extra £20 is the tax relief. If you're a higher or additional rate tax payer, you'll get even more tax relief, but you may need to claim the extra back from HM Revenue& Customs. We had a question from Lynne who is a higher rate tax payer and whose financial advisor recommended they contact HMRC once a year to claim the additional tax relief. She wants to know how do they know whether HMRC has factored that into their tax code. If you haven't got the full amount of tax relief because you're paying into an individual pension and some types of work place pension, then you'll get the same 20% tax relief, but you'll have to claim the extra 20% or 25% back from HMRC every year. Now, you can either do this in your tax return, if you fill one out, or by writing to HMRC. But, it's not your tax code they change, what happens is the amount of tax you pay decreases. If you're a member of certain types of work place pension, you won't need to claim that extra tax relief back because you'll get the full benefits automatically. The best thing to do is check with your employer. It's worth mentioning that in Scotland, the amount you get in tax relief is different and that's because higher earners pay more tax.

So, just to be clear, if you're a higher or additional rate tax payer, check whether you need to claim extra tax relief otherwise you could be missing out. Now, we've had a question from Ally who has just become a higher rate tax payer and who'd like to know if paying more into their pension will be more tax efficient. So, Clare, what's the answer?

The answer is, yes. That's because pensions are a tax reducer. So, say Ally is a member of a pension where they would have to claim the extra tax relief back, if they're now £1,000 over the higher rate threshold and they pay £800 into their pension, then £1,000 will come off their taxable income because £200 of tax relief is added onto the £800. But, they'll be able to claim another 20% back. So, that extra £1,000 has really only cost £600. Now, this is also a really good idea for people whose income is close or just over the high income child benefit tax charge threshold which is currently £60,000 a year. Or, the personal allowance threshold and that's currently £100,000 a year, because it could mean that that person doesn't have a child benefit tax charge, lose their personal allowance and even lose tax free childcare. But, tax relief is a generous incentive and because of that there's a limit on the amount of tax relief you can receive, although there's no limit on how much you can pay into a pension, the government does restrict how much you can pay in and still receive that benefit of tax relief. If you're an employee or a sole trader who pays income tax, then you can get tax relief on contributions up to £3,600 a year, or 100% of your relevant UK earnings, whichever is greater. Now, to pay in the full £3,500-, £3,600 it would actually cost you £2,880 a year. And, the government would add £720 by way of tax relief. Now, because we're talking about pensions there is going to be some jargon, you might not have heard of the phrase relevant UK earnings, but that's just your pay, bonus and overtime. But, it doesn't include any money from rental income, if you own a property and rent it out. Or, income from investments. So, if you have relevant earnings, UK earnings of, for example, £25,000 then theoretically you could pay £25,000 into your pension. For the majority of people that would be really unlikely, because we need our salaries to pay for housing, food and bills. But, there are some people who can afford to pay more into pensions and we'll come onto them in a moment.

But, if you're a director of a limited company, you may decide to take a small salary. Now, you want to pay yourself a salary to make sure you qualify for the state pension and other benefits. But then, you take the rest of your income as dividends because it means you have less income tax to pay. But, as a director of a company then it's also normally the company that pays pension contributions. So, why does the company pay pension contributions rather than the company director as an individual? Well, the reason is that it saves the company corporation tax and it means that you, as the director, don't need to worry about only being able to pay in up to 100% of your relevant UK earnings. And, there's no limits to the amount that a company can pay into a director's pension, if it's for the purpose of the business. But, in real life, the company wouldn't normal pay more than the annual allowance because the director would have a tax charge, and we'll talk more about that soon.

So, if there was one key point to make about tax relief, what would you say it is Sarah?

I think the main point is how much of a benefit it is. So, let's just recap on the maths. If you're a basic rate tax payer, every £100 you pay into your pension only costs you £80. If you're a higher rate tax payer, it will only cost you £60. Now, off the £40, £20 of that will automatically go to the pension and the other £20 might also go to the pension, or you might have to claim it back and it would reduce your tax bill. And, if you're a director of your own company then if you're company makes the pension contributions for you, the company gets corporation tax relief. But, let's move on now to something you may have heard of and that's the annual allowance. Now, often when we do webinars, we don't have enough time to explain this in detail, but we always get lots of questions about it. So, we wanted to take the time to talk about the annual allowance a little more today. Now, by the time this webinar is over you will all be annual allowance experts.

In broad terms, the annual allowance is a limit on how much money can go into your pension or pensions without you having to pay a tax charge. For defined contribution pensions, it's easier to work out how much of the annual allowance you've used. It's a total amount of money you pay in, your employer pays in and anyone else pays in on your behalf. For defined benefit pensions, it's more complex as there isn't a pot of money. So, it's the increase in the value of the pension benefits. Now, we'll say this a few times today, but this is complicated. The annual allowance isn't the maximum pension contribution you can make and that's because tax relief and annual allowance are two different things. You could still pay more into your pension if you wanted to, and could afford to and if you have high enough earnings, but you'd have a tax charge over the annual allowance. Currently, the annual allowance is £60,000 every tax year. It is important to say that the annual allowance will not affect most people in the UK, and that's because most people will be paying less than £60,000 a year into their pension. But, it is worth explaining how it works as this isn't just something that will affect higher earners.

Now, £60,000 is a lot of money and you might be thinking, 'Well, who is using up their annual allowance?' Well, we see people who've inherited money and who maybe want to make up for when they weren't able to pay much into their pension. It's also quite common for business owners to reinvest profits in the business and then only later think about saving for their future and when they do start saving, they often want to put really large amounts of money into their pensions, often at the end of the tax year. But Clare, if someone wanted to put more than £60,000 into their pension in a tax year, would they just have to take that sort of tax charge on the chin and pay it? Or, is there a way round this? Now, we've had a question from Philip saying that he's normally-, are they taxed normally on the amount they pay in over £60,000.

Well, if you do pay in more than £60,000 the amount of the tax charge would be the same as the tax relief you would have got. You pay an annual allowance tax charge through your tax return, or if it's more than £2,000 it can be paid from your pension scheme, and that reduces the amount of money in your pension. Now, your pension scheme will explain this when they tell you that you've gone over the annual allowance. But, there could be a way to pay in more than £60,000 and not be faced with a tax charge. Now, I've got to wave jargon alert Claxton here because we're going to be talking about something called carry forward. Again, it's quite complicated but we're going to talk through this with some figures. We've had quite a few questions about carry forward over the years which is why we're keen to cover it today. Carry forward let's you use unused annual allowance from the last three tax years before the current tax year. So, that means that you may be able to pay in extra into your pension over and above the £60,000 annual allowance for the current year. Now, one important point to make is that you can only use carry forward for the years that you were a member of a pension scheme. It doesn't matter if you only paid £20 into your pension 30 years ago and then never paid anything else. It just matters that you are or were a member of a pension scheme.

Let's have a recap. Carry forward isn't relevant if you don't have the earnings to pay a large pension contribution. So, for example, if you're an employee and you earn £40,000 a year, and the most that you and your employer, if you're in a work place pension, could pay in and still get tax relief, would be £40,000 in a year. So, it's important to understand that the annual allowance covers money that you pay in and your employer contributions. But, in this example, because you haven't paid in more than £60,000, then you don't need to think about the carry forward. It's most likely to be used for a company director as the company can make very large pension contributions.

That's right. Now, there are a lot of numbers but hopefully this slide will help. So, here we've got someone who wants to pay in £150,000 to their pension and they are a company director, so this is coming from the business profits. They first paid into a pension 20 years ago when they were an employee, but stopped when they started their own business 15 years ago. Now, the fact that they were a member of a pension scheme, even 20 years ago, means that they have carry forward available. So, how it works is that you start in the current year and you use that £60,000 of annual allowance first. Then you go back three tax years before, so in this case that's the 2022, 2023 tax year. If you didn't use all or some of your annual allowance then it's available to carry forward now. In that tax year, the annual allowance was £40,000. So, that's £100,000 of your £150,000 now covered, because you've got £60,000 from the current years annual allowance, and £40,000 from the 2022, 2023 tax year. Then, you look at the tax year after that, which is 2023, 2024. The annual allowance increased in 2023 to £60,000. So, that's more than enough to cover the remaining £50,000 that you want to pay in. So, it means that by using carry forward you could pay £150,000 into your pension, this year and you'd have no annual allowance tax charge. And, next year, if you wanted to make another large contribution, you'd have £60,000 for 2026, 2027, plus £10,000 left from the 2023, 2024 annual allowance, as well as the full 2024, 2025 tax year.

Well, using carry forward isn't straight forward. If you want to make very large contributions to your pension and use carry forward, it is really important to take financial advice. Now, the financial advisor will be able to do those calculations for you. We mentioned at the start that this session is aimed at people with defined contribution pensions. But, if you're a very high earner with a long service in a defined benefits scheme, such as a final salary, a career average type of pension. Then, it's even more important to take financial advice. That's because working out how much you may be able to carry forward, isn't as easy as adding up you and your employer's contribution. If you want to find out more about how carry forward works, there's a useful article about it on the independent and Government backed, Money Helper website. Now, we-, we received a question from Stephen about carry forward, he wants to know how and when do you notify HMRC that you've used carry forward? The first thing to say is, if you pay a pension contribution of £60,000 or more into one pension in any one tax year, that pension provider has to write to you. But, that doesn't' mean you have a tax charges, you may have carry forward, but your pension provider won't know that. Secondly, from a tax point of view you don't need to claim carry forward, but you should keep records. You only need to tell HMRC in your self assessment if you go above you annual allowance, including any carry forward as then you will have a tax charge. So, in the example we just spoke about, there wouldn't be a tax charge because there was carry forward. And, just a reminder that the tax charge is the same as the amount of tax relief that you would've received. So, I hope you're all still with us, that was the trickiest and most technical part of the webinar.

So, we've talked about tax relief on money that goes into your pension and how the limits work on what you can pay into your pension and still get tax relief. But now, we'll focus on tax when you take money out of your pension.

You can usually start taking money from your pension once you're aged 55, although you can leave your money where it is if you don't need it. That minimum age is rising to 57 in April 2028, having said that, you may be able to take money out of your pension before you're 55 if you're seriously ill or have something that's called a protected retirement age. Which, some people, such as fire fighters and police, have.

And, when you do take money out, you can usually take up to 25% of your pension pot tax free. Anything else that you take out of your pension or pensions, will be taxable. And, Sadie said that she thought she had to take the whole 25% tax free cash in one go, but she's heard that that's not the case. And Sadie, that's correct, you can take your tax free cash all at once, or you can take it out in a series of payments. The key thing to know, and it's something we get asked about at every webinar we do, is that if you have several pensions, you can take 25% of each of your pensions, tax free, not just from one. However, you have to take that 25% from each pension. Now, that sounds a bit confusing, so again let's explain this using a slide. So, if you have one pension with £40,000 in it, one with £80,000 and one with £100,000, you'll be able to take £55,000 in total as tax free cash. However, you can't take that £55,000 from, for example, the pension with £100,000 in it. You'd have to take £10,000 from the pension with £40,000 in it, £20,000 from the pension with £80,000 in it, and £25,000 from the pension with £100,000 in it.

If you're in the fortunate position to have built up a lot of money in your pensions, specifically if you have more than £1,073,100 in your pensions, then you cannot take more than £268,275 in tax free cash. Now, there are some people who can take more of-, than that, because they had a right to more in years gone by. But, most people are limited to £268,275 which let's face it, is a lot of money. Now, we had a question from Kushal (ph 19.29) who asks, 'Is there a limit on the amount of money you can have in your pension over your lifetime?' And, the answer is that during your lifetime, you can build up as much money as you like in your pension or pensions. There used to be a limit on how much you could build up but that was scrapped a couple of years ago. But, there is a limit on the amount of tax free cash you can take and there are rules on pension lump sums and death, but we will come onto those later. Clare, I do think it's worth explaining what else you need to do if you want to take your tax free cash from your pension, because you can't just take the tax free cash and leave the rest of your pension where it is, can you?

That's right, you can't do that. When you take your 25% tax free cash, you have to do something else with that other 75%. So if you want to take some tax free cash, then you either have to use the other 75% to buy a guaranteed income for life, by purchasing an annuity, or you have to move the 75% into income drawdown. With drawdown, you don't have to take any money out of drawdown if you don't want to or you don't need it, but you do have to move it into drawdown. And, there's a third option, you can take money directly out of your pension as a cash lump sum. But, in that case, 25% of every payment you take is tax free and the other 75% is taxable. Now, I, I know that all sounds a bit confusing, so again we're going to look at it on some slides. Now, in our example this person has £100,000 as a pension pot. They can take a cash lump sum for £25,000, will be tax free and £75,000 will be subject to tax. Now, that's not such a good idea if they're working though, because they will lose a lot to tax. Next, they could buy an annuity, "25,000 will be tax free and then £75,000 will be used to buy the annuity. The annuity income they will receive every month is subject to tax. Onto the next slide, drawdown. The first option is more suitable for someone who wants their tax free cash, but doesn't want any taxable income. In that case, the £75,000 moves into drawdown and hopefully just grows until the person does want to start taking money out. Now, the other drawdown option is to take the tax free cash, move the £75,000 into drawdown, but start a regular payment from drawdown and that would be taxable. And, there are some other choices available too, someone might not want a regular monthly drawdown income, but instead just to take money out a couple of times a year for example. Now again, as soon as the money comes out of drawdown, it's subject to tax. So, as a reminder, when you take any money out of your pension that is taxable, your pension provider will deduct any tax that's due before it pays you. Now, this can come as a surprise to some people who think that HMRC may ask for the tax after they've received their pension money. Unfortunately, that's not how it works. HMRC rules say that pension providers must take the tax that's due and pay it to HMRC.

And, the fist time you take a lump sum out of your pension that's not a tax free cash lump sum, you might be taxed too much because of the emergency tax code. That's because your provider probably doesn't have an up to date tax code from HMRC for you. To comply with the tax rules, they apply an emergency tax code on what's called a month one basis. This means, your personal allowance and tax bands are divided by 12, and the system assumes you'll withdraw the same amount of money from your pension every month for the rest of the tax year. For example, if you take £10,000 as a one-off payment, HMRC treats it as if you'll receive £10,000 each month. So, that could be £120,000 a year. The result? Well, the pension provider takes off much more tax than you might expect, even if your actual income is far lower. This approach is designed to prevent under payment of tax, but for most people it leads to an overpayment of tax upfront. The good news is that HMRC will correct your tax position and pay back any tax it owes you, but if you want your money back sooner then you can reclaim it. There are specific forms for this depending on your situation. Now, these forms can be completed online or by post and refunds typically arrive within 30 days. If you don't claim, HMRC will adjust things at the end of the tax year, but that could mean waiting months for your refund. So, if you're planning a lump sum withdrawal, it's worth factoring in emergency tax and knowing how to reclaim it quickly. But Clare, there's a way you may be able to avoid paying a large emergency tax bill, isn't there? And, it's one that you've been quote in a lot-, a number of newspapers recently.

That's right, the temptation is to make your first withdrawal a big one, to splash out a little after years of careful saving. A big holiday, new car, renovations for example. Unfortunately, that's exactly how you end up paying a large chunk of your life savings in emergency tax. One way to avoid the shock of an emergency tax bill is to make a small initial withdrawal. That small withdrawal helps make sure that the appropriate tax code is applied to future withdrawals. So, you only pay the tax that's due rather than being hit with an emergency tax that you'd need to reclaim later. The best thing to do is to get in touch with your pension provider months in advance of needing your pension money for a large purchase. Ask if you can make a small withdrawal, and how much that needs to be. It will differ from company to company. But, if you can't do that and you need to pay emergency rate tax, make sure you claim it back as soon as possible.

One trend we're noticing increasingly, is that people are partially retiring rather than necessarily stopping work fully and relying solely on their pension. So, they may work part time or turn a hobby into a part time business. If you're someone who is thinking of working but also living off some of your pension income, there's another allowance to be aware of. It's called the money purchase annual allowance, which I think is a good one to add to our jargon collection. Now, if you've dipped into your pension flexibly, such as taking a lump sum or starting to draw income, the rules around how much you can pay into your pension change. Normally, if you have the earnings to support it, as we've been discussing, up to £60,000 can go into your pensions without a tax charge. But, once you trigger the money purchase annual allowance, that limit drops to £10,000 for defined contribution pensions. This is designed to stop people taking money out and then putting it straight back into their pension to get extra tax relief. The money purchase annual allowance is triggered by certain actions. Like, taking a taxable lump sum, rather than tax free cash. Or, drawing any amount from an income drawdown plan. Simply taking your tax free cash and moving the rest of your pot into drawdown won't trigger the money purchase annual allowance, or MPAA.

So, if I was 55 and still working and I just wanted to take £25,000 tax free cash from my £100,000 pension, but I didn't want to take any taxable income, that wouldn't trigger it. That's right Clare. But, once the MPAA applies, it covers all your defined contribution pensions, not just the one you're taking money out of. Your pension provider will tell you when you've triggered the MPAA, but it's your responsibility to tell every other pension provider that you have. However, if you have a defined benefit pension and are paying into a defined contribution pension as well, then the £60,000 allowance is still available. You could pay in up to £10,000 in defined contribution payments and up to £50,000 for your defined benefit pension, for example. You can't carry forward MPAA, so if you don't pay any pension contributions to your defined contribution pension one year, you won't have £20,000 of allowance the next year. However, you can still use carry forward for your defined benefit pensions. So, why does this matter? Well, it matters to anyone who plans to keep saving into their pension after taking money out. If that's you, it's important to know whether the MPAA applies. Going over the £10,000 limit can lead to an unexpected tax bill. So, before making withdrawals, check what triggers the MPAA and think about how it fits with your future savings plans.

There's the useful exception in the pension rules if you have small pension pots. If you have up to three personal or work place defined contribution pensions worth £10,000 or less, you can usually take them as cash lump sums without triggering the money purchase annual allowance. This means, subject to your earnings, you can keep that full £60,000 of annual allowance for future contributions. So, if you might want to pay large pension contributions in the future but still want to access some money, it might be worth keeping three small pots separate. Now, often we talk about transferring your pensions because it can help reduce costs and admin. But, if you moved all of your pensions together and took out more than your tax free cash, then normally you'd trigger the money purchase annual allowance. So, it's worth thinking about leaving a few small pots. Perhaps you've got five pension pots, three are under £10,000, two are much larger pensions. It might make sense to combine the, the two larger pots but leave the smaller pots so you can use this rule. So, let's think about how this works in practice, and we've got a slide on it. So, Janet has three different work place pensions work £6,000, £8,000 and £9,000, together totalling £23,000. She closes all three under the small pots rules. So, here's what happens. She gets £25,000 tax free from each pot, a total of £5,750 made up of £1,500, £2,000 and £2,250. The remaining amount from each pension pot is taxed at her usual income tax rate. If Janet is a basic rate tax payer, that means a total of £3,450 in tax. Now, this approach can be a helpful way to access smaller pensions without restricting how much you can pay into the pensions. But, always check the rules and consider the tax implications before making a decision.

But, what about how your income is taxed in retirement, how does that work, Clare?

Well, your income in retirement is taxed just like any other income. Everyone has a personal allowance which is £12,570 for the current tax year and you pay tax on anything above that. Taxable income includes your pension or pensions, state pension and most state benefits. Some income, like ISAs and your tax free lump sum, isn't taxable. Now, due to increases in line with the criteria of the triple lock, the full new state pension will just be under the personal allowance from April 2026. Although increases to the state pension have been welcomed by pensioners,l paying tax when they previously didn't, or an increase in tax that they now need to pay, well, it's not such good news. It is worth remembering though, that many pensioners don't get the full state pension. And, it's important to say that tax won't be deducted from your state pension before you receive it. If you receive retirement income from a private or workplace pension, then you'll notice a deduction in the amount of money you, you've paid into your bank account, as more of your pension income will be subject to tax. That's because the easiest way for tax to be taken is through the PAYE system. HMRC will consider all income, including state pension, when issuing a tax code to your pension company. And any tax is deducted from that work place pension. If you don't have any other pensions and you already complete a self assessment tax return, then you can pay your tax through that process. But, if you only have state pension and not other income and your state pension is over the personal allowance, then HMRC will write to you in the summer after the end of the tax year, and you'll have until the end of the following January to pay any tax bill.

But, we're going to move on now, aren't we, Sarah. And, this is something we are being asked about a lot. How are pensions taxed on death.

Yes, that's absolutely right. We had a lot of questions about this. When you die, you can usually leave your pension pot to whoever you like, but there maybe income tax for them to pay. For income tax, it depends on when you die and the type of pension you have. If you were to die before the age of 75 and leave money in a defined contribution pension pot, or in drawdown, your beneficiaries don't have to pay income tax on the money they withdraw unless something called the lump sum and death benefit allowance has been exceeded. Now, that's another lot of jargon, but basically this limits the amount of tax free lump sum that can be paid both while you're alive, and on death. And, this is set at a £1,073,100. Anything paid as a lump sum above the available lump sum on death benefit allowance, is taxed at the beneficiary's normal rate of income tax. However, if your beneficiary has bought an annuity, or moved the money into beneficiaries drawn down, then this limit wouldn't apply because then they would receiving the money as income rather than lump sum. If you die at the age of 75 or over, your beneficiaries have to pay tax at their highest income tax rate on any money they withdraw. It's different if you have defined benefit pensions as you, if you die at any age, and your husband, wife, partner or children receive a regular pension from a defined benefit scheme, then it's subject to income tax. It doesn't matter what age you are when you die.

So, that's income tax, but the question we get a lot just now is about inheritance tax, and that's because of a change that was announced in last year's budget. Under the current rules, most defined contribution pensions can be passed on to your beneficiaries without them having to pay inheritance tax on the money they receive. Now, one question we received from Aaron was, when do the rules change? Now, these rules are due to change for people who die on or after the 6th of April 2027. From this point, defined contributions maybe subject to inheritance tax, depending on how much other money or property you have on death. Now, Wendy had a really good question. She asked, 'What are the three best things everybody needs to think about before the new pension changes come in in April 2027, bringing pensions inside of IHT thresholds?' Well, my first top tip would be not to panic. For the majority of people, they will use their pensions for their retirement. And, on their death it will probably go to their husband, wife or partner for the rest of their retirement. But, if you have a lot in pensions and other assets, like investments and property, then my next top tip is to go and see a financial advisor. There are things that you can do to reduce or deal with potential inheritance tax bills, like taking out a certain type of insurance policy, or giving money to family, friends or charity. But, Sarah, do you have a third tip?

Well, I do and that's if you have a lot in pensions, have a think about what your expression of wish form says. If you're married or in a civil partnership but have chosen to leave your pension to your children and inheritance tax will be an issue, it might be better to leave it to your husband, wife or civil partner as then it's example from inheritance tax. Now, there could still be inheritance tax to pay on the second death, but if pension money is being used by that surviving spouse or partner, it may not be as much. Now, I wouldn't say that this next one is a top tip because it's up to everybody, but if you have lived with someone for a long time, being married or in a civil partnership is better from a financial planning point of view, although I guess it's not the most romantic reason to get married. Now, we did get another question which is from Ming-Huay who says, 'Does someone who inherited a pension pot which has been charged inheritance tax already, still need to pay income tax on it?' And, the answer to that is yes. When these changes happen, if the person who died is aged 75 or over, and inheritance tax is payable, then the inheritance will be, will be paid first because that's needed to get probate or confirmation. Then, if money is taken out of the pension as a lump sum or income, income tax will be paid. But, if nothing is taken out, for example because the money is draw-, in drawdown, then no income tax will be payable. Now, we are still waiting on quite a lot of regulations about how this will work, but once we know all the detail, we will have a session that spends a lot more time on this topic. In the meantime, we have a guide to the changes on inheritance tax on pensions. Clare, which you've written.

Yes, well, now let's move on to some of the most popular questions that have come in while we've been live. And, we've been having quite a few of these questions that have been coming in. Let me just see if I can get those up. Right, so we've had a question from David who says, 'Can I continue to pay into my pension fund after I've started to withdraw from the fund?'

So, we, we've sort of been talking about this, but I think it's worth just maybe a brief recap, because it is, like a lot of areas we've been talking about, a bit complicated. Well, that's right. So, I think David's referring to when we were speaking about the money purchase annual allowance. And, that's the idea that once you start taking out money that's taxable from your pension and you've flexibly accessed it from a defined contribution pension, then you'll trigger that money purchase annual allowance and that might mean that you're restricted to £10,000 of pension contributions a year. So, it is, you know, it's-, a lot of people still won't pay-, them and their employer, won't pay in £10,000 a year. But, for people who want to pay in more of that, then it's worth thinking about how you're going to take out money and what money you need to take out in advance.

Okay, well, we've had another question which is, 'When you drawdown a pension lump sum into a drawdown pot, 25% can be taken tax free. But, when do you pay tax on the rest? Is it when it goes into drawdown, or is when you take it out as income and, you know, it goes into your bank account or whatever?' And, that's a question from Elizabeth.

So, Elizabeth, basically what's happening is, when that money moves into drawdown you can leave it there and especially if you're still working which many people are. They just leave it, and drawdown is just like money in your pension pot in a way, it's staying invested and hopefully it's growing. It's only when you take money out of that drawdown pot that there would be income tax paid. So, if you say take your tax free cash at age 55, but you don't actually start taking any income from drawdown until you stop working, say at 65, then you won't pay any income tax until you are 65. Because, the money in the pot is just growing, so there's-, it's only when that money comes out of the pot and into your bank account that the pension provider will apply tax on the way out. And, here's a sort of related question, but it's about investing rather than tax and it's from John who says, 'If I convert to a drawdown pension but only take part of the tax free portion, does the remainder of that tax free money continue to be invested as the kind of 75% does? Or, or what happens to it?' Okay, so I think maybe using an example is a good one for this. If you've got-, let's think about that £10,000 pot again, in your pension pot. If you decide that you would like £2,500 of tax free cash, then £7,500 moves to your drawdown pot. Now, the rest of that £90,000 is still in your pension pot and that can still be growing. Now, then if you want to take some more tax free cash. So, say in a year's time you want to take another £2,500, then the other £7,5000 again will move into drawdown. Now, if you do it that way, hopefully your pension pot is growing so the idea is that you might actually end up with more tax free cash than if you took out £25,000 as tax free cash, and moved that £75,000 into drawdown. Because, it's 25% of the pension pot at the time you take it out, so hopefully that kind of explains that. That does seem a bit complicated, but it's just that you can take your tax free cash in different ways, and the 25% is based on the pot size, your pension pot size.

Now, we've had a question from Lindsey, and this is one that comes up, I think, in every webinar, and it, it's, it's really worth covering. Which is, 'Do you have to claim back tax relief if you have a salary sacrifice scheme?'

So, I think it's maybe worth explaining. So, it's often called salary exchange and salary sacrifice, and this where you sacrifice or exchange some of your salary in return for your employer making all the pension contributions, so you don't make any at all. And, the, the beauty of that is that it comes off your salary before tax is paid. So, it can be quite tax efficient, but what does that-, where does the tax relief go? So, basically, because it's coming off your salary at that point in time, you're going to get the full benefit of 40%, 45% in tax relief. So, you don't have to claim it back, you're already getting that. Now, many people have group personal pensions, GPPs, and those would be the type of pensions that you would normally have to claim that money back. So, if you're a 40% tax payer, you would get the 20%, but you'd have to claim the other 20% back from HMRC. But, if you're in a salary exchange scheme, you don't have to do that, you are going to get the full amount of tax relief up front and that's because when you agree that contract with your employer, your salary is reducing so you are getting the benefit of a reduction in income tax and you are going to get the full benefit of that upfront. So, don't worry, you don't have to claim it back. I'd say if you're a bit confused about what type of work place pension, if you have salary exchange, ask your employer, your payroll department, what type of, of pension it is and whether you need to claim any tax back. Because, it is really important that you do make sure you're not missing out on any money.

I've had question from Stephen which is picking up on what, what you were talking about earlier Clare, about being able to take your tax free-, you don't have to take it as a lump sum all in one go, you can take it in a series of payments.

So, Stephen says, 'Can you withdraw your tax free percentage every month?' So, taking £1,000 tax free and £3,000 taxable? Yes, yeah, you can. So, and some people choose to do that. So, every month they have a portion that is tax free and a portion that's taxable. So, again, what's happening is that-, so, you know, in this situation, you're taking £1,000 monthly that's going to be tax free, and then you're going to move, sort of, money into your drawdown account and then you're going to take out that drawdown account and that would be taxable. But, you can set it up like that, you don't-, again, you don't have to take-, kind of, take it out in kind of big lump sums. It can be a really efficient way to do it. Some-, you can choose just to take out, kind of, to not actually have the taxable element as well. So, actually just have tax free cash coming monthly into your account. So, instead of taking-, you know, in that £100,000 example again, instead of getting £25,000, you could set up to have £1,000 a month until you've used up all of your £25,000 of tax free cash. Now, that can be really useful, people are using that if, for example, they were going part time at work. So, you don't want to stop working, but you might decided, 'Well, I'd quite like to reduce my hours I don't get state pension yet, so I'd like to top up my income a little bit.' That's a really tax efficient way to do that, because taking that tax free cash, without a taxable part, means that you're not going to be paying more tax. Because, if you take any taxable money, it's going to sit on top of your salary income and you'll just end up paying more tax. So, there are lots of different options out there. It does all feel confusing, but you can take your tax free cash in portions.

Okay, I think we've got time to squeeze in one, maybe two questions if we're quick. And, one from Stephen, and you were talking earlier on about relevant UK earnings and, he says, 'What are the relevant earnings that determine how much tax relief you get? Do they include things like state pension and income from a defined benefit company pension, for example?' What's the answer Clare?

For relevant earnings, then that-, you are thinking about things like, kind of, pay and bonus and overtime, because that's about, kind of, working out what you can pay pension contributions on. So, it's, it, it isn't-, when you're thinking about, kind of, taxable income, you are thinking about state pension and other income from defined benefit pensions, for example. When you're thinking about paying money into pensions, then it is-, it would normally be things like pay, that's the, kind of, the main one we'd be thinking about.

Okay, well, one, one question we'll definitely sneak, sneak in, which is from Harry. Who says, 'What's the maximum lifetime limit of a private pension?'

Now, this is something we were talking about earlier on when we were saying that there used to be a limit, because there was a change a couple of years ago. So, I think it's maybe just worth reminding in people of actually what the situation was and where we are now. That's right, so there used to be something called the lifetime allowance, and what happened was that every time you did something with your pension, so for example if you took money out and moved-, you took your tax free cash out and you moved money into drawdown, that would be tested against the lifetime allowance. If you were over at that point in time £1,073,100, then you would have a tax charge. But, that's gone, so in your lifetime the only kind of limit that there is, is that limit on the amount of tax free cash you're allowed which, as Sarah mentioned earlier, is £268,275. Now, to have that amount of tax free cash, you would have a pension of £1,073,100. So, in your lifetime, that's the only limit. It's on your death there is this lump sum in death benefit allowance, so they'll look at how much you've taken as tax free cash. So, say you took all of that £268,275 and then if your beneficiaries choose to take money out of your pensions as a lump sum, so they said we want it all out as cash. If that was over £1,073,100 then they would have a tax charge on that, just kind of the, the part that's over that. So, that's when, when it comes-, you know, it, it's, we need, you need to think about it. If they chose to go into drawdown or buy an annuity, that's not a lump sum. So, you could choose to go into beneficiaries drawdown for example, and then quite quickly take out, sort of, half of it and then another half later on. Now, if the person who died was 75 or over there'd be an income tax charge. But, you wouldn't have that lump sum in death benefit allowance being used up, because it's not a lump sum, it's coming out as income. Well that, I think there's one last-, I keep saying one last question, but you know me. So, I can't see the name of the person who asked it, but, but basically wanted to know, do I have to take my 25% tax free cash lump sum on my retirement date? So, hopefully a quick answer to that one and then we'll-, Is there ever a quick answer in pensions? So, what will normally happen in workplace pensions is there will be a retirement age set, but you can change that. You can bring it forward, you can push it back, that's just so that the pension company knows when to start sending out information to you, because you might want to make choice, you might be coming up to retiring. We don't really have, kind of, set retirement dates. It used to be the case that there was, but people stop working sometimes when they're, you know, 55. Some people work until they're 72. So, there's all different ages, so you can change that and, you know, when you're coming up to retirement or even before, it might be useful to change it if you want to retire a bit sooner. So, say it's set at 65 and you want to change it to 60, then you can do that. So, normally if you've got an app, you can maybe change it on that or you get in touch with your pension scheme and they will change it, and that will just change, kind of the information you get. And, when pension companies, you know, are sort of-, they'll send you your annual statement, your app will say it, it's got forecasts of how much you'll have in your pension. It's based on that age, so based on 65. So, if you ask them to change it, then those forecasts will change too. Okay, well, thank you very much. There are a few more questions but I'm afraid we're going to have to wrap up now. But, there are a few more things to remember, first of all claim back any tax relief if you're a high or additional rate tax payer. Don't miss out. If you want to pay very large amounts into your pension, then it's definitely worth taking financial advice. And, before you take money out of a pension, think about the tax implications. And, don't forget there is lots of help available from our Royal London Money Guides, your employer, your pension provider and independent sources like Money Helper.

Well, thank you so much for joining us today. We hope you found this session, our last webinar of 2025 actually, helpful. We'll be thinking about the first webinar of next year soon, so it's time for a poll. I'd like to know what would you like us to talk about?

So, do please vote in our poll. Okay, so a few votes coming in. At the moment, the clear runner seems to be paying money into pensions, savings and ISA. But, it is changing quite rapidly, so you know, we'll be looking at this as, as the voting settles down and we'll be trying to reflect this in the webinar that we do.

So, now we'll be sending out a link to the recording to this webinar in the next couple of days, but in the meantime, thank you very much for joining us.