Do I pay income tax on pension income?

A defined contribution (money purchase) pension arrangement is split into two parts when you retire and start to take your benefits. You can take a lump sum of up to 25% tax-free, while anything above this is subject to Income Tax at your marginal rate.

Your pension provider will provide you with payslips and contact HMRC for a tax code. You may initially over pay Income Tax until the pension provider receives your correct tax code.

Alternatively, you could buy an annuity. You can still take the first 25% of your pension tax-free, but then the remainder is used to buy yourself an income for life from an insurance company. This annuity income will also be added to the rest of your income and taxed at your highest marginal rate.

Read Drewberry’s guide on the differences between annuities and income drawdown.