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Pension schemes can have money withdrawn from them so long as the holder is at least 55 years of age. The first 25 percent will be tax free and income tax is usually charged on the remaining 75 percent.
Redundancy arrangements can have an impact on pensions.
If the person being made redundant wishes to do so, they can use part of their redundancy payment to make pension contributions, which could provide tax incentives.
In some instances, an employer may agree to allow the person involved to give up some of their redundancy payment as an employer contribution to a pension scheme, which is known as a “redundancy sacrifice”.
Additionally, if a person has been offered a tax-free cash sum on retirement from their workplace scheme, it will have no bearing on a redundancy settlement.
Once all tax-free entitlements have been used, any pension income paid out is treated as earned income by the state.
This means that income tax will likely be levied going forward.
The amount of income tax paid will depend on the person’s total gross taxable income.
Currently, the government will allow people to receive up to £12,500 in income before any tax is levied, known as the “personal allowance”.
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Beyond this personal allowance, people will see their income taxed on a tapered scale as detailed below:
- Basic rate: £12,501 to £50,000 – 20 percent
- Higher rate: £50,001 to £150,000 – 40 percent
- Additional rate: Over £150,000 – 45 percent
There are also annual allowances in place which determine how much a person can save into their pensions before tax needs to be paid.
Tax will only be paid on pension contributions if they go above an annual allowance of £40,000 in a tax year.
An annual allowance will be applied to all forms of private pensions which includes:
- the total amount paid in to a defined contribution scheme in a tax year by the employee or anyone else
- any increase in a defined benefit scheme in a tax year
Some savers may also be affected by the “lifetime allowance” which will impact people who have more than £1,073,100 saved in private pensions overall.
If a person goes above the lifetime allowance, they’ll get a statement from their pension provider(s) telling them how much they owe in tax.
The provider will deduct these taxes before the person starts receiving income from the pensions.
The rates of tax levied on pension savings received above the lifetime allowance will be 55 percent if it’s taken as a lump sum or 25 percent if it’s taken in any other way.
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