Tax on pension income

Tax on pension payments

Although you get tax relief on the money you pay into your pension, you do have to pay tax on the income you receive in retirement.

Your pension is treated the same way as any source of income and the income tax rate you’ll have to pay in retirement depends on how much income you have from all sources including your State Pension and your occupational pension.

For SPPA administered pension schemes, any tax due on your payments will be deducted through our pensions payroll system. If you have other sources of income (excluding any State Pension), you’ll have to make arrangements to pay any tax you’re due through HMRC’s self-assessment system.

Tax-free lump sums

Under current tax rules the permitted maximum tax free lump sum is 25% of the lower of:

£268,275 (unless you hold HMRC protection), or:
the capital value of the member’s benefits being paid (after commutation decision has been taken into account).

When you first claim your benefits, you’ll have to decide how much of your pension you want to ‘commute’ to create a lump sum. Even if your scheme provides a compulsory lump sum at retirement, you’ll still have the option to increase your maximum lump sum. If you take a look at the calculators in your particular section of the SPPA website, you’ll be able to forecast the impact that taking lump sum would have on your retirement income.