Pension Tax Advice

High net-worth individuals with large pension pots are increasingly at risk of attack by the Chancellor and HMRC because such pension pots represent an easy source of taxation in terms of both Inheritance Tax and Income Tax. This attack comes both in the form of new taxes imposed on large self-invested pension pots (“SIPPs”) and also an increasingly litigious HMRC seeking to limit the scope for saving tax on pension payments to those who have moved abroad. My description of the pension tax changes announced by the Labour Government in the October 2024 Budget which will take effect from 6 April 2027 can be found here.

This and the other related pages here explain how tax affects pension pots and whether you can take steps to minimise the tax you might pay after reaching retirement age when drawing money from your pension pot and how moving from the UK and drawing down your pension overseas might reduce or eliminate the UK and foreign taxes that you might otherwise pay, and the tax risks involved.

How are pensions taxed in the UK?

You pay UK income tax on your total annual income to 5 April each year which includes any state pension, personal pension payments, any earnings from employment or self-employment and any other taxable income including investment income and rents. There is an annual tax-free personal allowance of £12,570 but this is tapered once your income exceeds £100,000 and is nil when your income reaches £125,140. Currently you can also receive a one-off tax-free lump sum allowance of up to £268,275 from your pension pot.

Can you reduce the amount of tax you pay in retirement?

If you stop working or reduce your time spent working then your taxable earnings will normally reduce, leading naturally to a corresponding reduction in the income tax you pay on your earned income. However, if you replace the lost or reduced earnings by taking regular pension payments from your pension pot these receipts will, in principle, be taxed as income. It may be that your total taxable income then reduces so that for example you fall below the £100,000 annual amount at which the tax-free personal allowance of £12,570 starts to reduce.

However, for those successful and productive people with large pension pots who wish to enjoy their retirement and who may well have sons and daughters and even grandchildren whom they wish to assist financially, the issue will be how to draw down sufficient funds while legitimately minimising the UK tax they pay and how to deal with the Inheritance Tax charges that come into effect in April 2027.

In addition, it will be important to ensure that the amount drawn down each year allows for a minimum pension pot to be safely maintained for the duration of your expected retirement so that you do not run out of money in old age and to decide how to invest the funds in your pension pot and how much investment risk you are willing to assume. I can assist with the tax issues surrounding this but I am not a financial adviser and so for deciding on the rate of pension drawdown and how to invest your pension pot you will either need to decide that yourself after consulting the copious resources now available for free on the internet or, if you prefer, obtain advice from a good Independent Financial Adviser such as Simpsons Wealth Management.

What are the tax implications for expats and non-doms?

Some of the most effective tax planning with pensions can be achieved when you retire abroad and take the protection of a double tax agreement between the UK and the country to which you have moved. However, careful consideration needs to be given to the precise wording of these tax agreements and also how you structure your pension drawdowns after you move abroad. HMRC are becoming increasingly aggressive in this area and detailed professional tax advice is essential in order to understand the tax risks involved and how to minimise the chances of a challenge by HMRC and/or the foreign tax authority.

What are the advantages of tailored pension tax planning?

Tailored pension tax planning takes account of your individual personal circumstances and should ensure that only realistic and achievable tax savings are aimed for, that you stay within regulatory and legal requirements and that you properly understand the details and implications of the tax planning.

When should I seek tax advice from a barrister regarding my pension?

There are two main areas where a tax barrister can assist. First, in helping you and your pensions adviser understand the finer tax implications of the pension planning under consideration and in assessing any risks in terms of your tax filing position and how HMRC and/or your pension provider may react to what is being proposed. Second, if HMRC scrutinise the planning by opening a check into your pension tax affairs or worse, decide to challenge the tax planning then a barrister can assist in dealing with HMRC and if necessary, representing you in an appeal to the tax tribunal.

Overseas Pension Advice

A major part of pension tax planning involves looking at a move overseas and how the tax you pay on your pension may be reduced or eliminated as a result. Careful tax advice is essential to ensure that you maximise your chance of success.

Investment And Portfolio Tax Advice

As mentioned above, I do not give financial or investment advice and you should retain the services of a good Independent Financial Adviser (“IFA”) if you decide that you need such advice. I can however provide detailed tax advice to you and your IFA on the implications of any financial or investment advice under consideration.

Pension Sharing On Divorce

Pension sharing on divorce is a specialist area best dealt with by a matrimonial solicitor with detailed experience of such matters however I can supply detailed tax advice to you and your solicitor on the finer tax implications of any proposal.

International Pension And Cross-Border Issues

The tax effects of pension transactions that cross national boundaries are often complex and require detailed analysis and tax advice in order properly to understand the implications and whether there are any appropriate ways to minimise the tax costs.

HMRC Enquiries And Disputes relating To Pensions

HMRC are becoming increasingly aggressive and litigious now that persons who have reached retirement age can use flexible draw down to take out as little or as much from their pension pot as they wish. If you combine flexible draw down with a move abroad and you receive favourable tax treatment in your new country of tax residence you may well be scrutinised by HMRC and this is where careful and detailed tax planning advice from a barrister in constructing the arrangements could be essential to achieving a successful outcome. Please see the Overseas SIPPs Advice page for more on this topic.

Frequently Asked Questions