An expert has issued a warning to Brits about a key threshold that many forget when planning their retirement income: the personal allowance for income tax.
Personal Allowance and State Pension
Antonia Medlicott, founder and managing director of financial education specialists Investing Insiders, highlighted that the standard UK income tax personal allowance is £12,570. However, the state pension for 2026/27 is £12,548, leaving just £22 of tax-free income before any other pension withdrawals are taxed.
"This is something that many people forget, and can seriously affect your pension plans if not accounted for," Medlicott said.
Tax Implications
Almost everything withdrawn from a pension will be taxed at 20%, rising to 40% if total income exceeds £50,270. Medlicott advised careful planning rather than dipping into pension pots as and when.
Partner Planning Saves Tax
Planning with a partner is "one of the simplest and most effective ways to reduce your tax bill," Medlicott noted, and is "overlooked surprisingly often." If a partner has a lower income, withdrawals can be spread between them to use both personal allowances and tax bands, potentially saving hundreds of pounds.
Withdrawal Strategy
Medlicott emphasised taking only what is needed and ensuring the pension lasts. For example, with a £600,000 pot growing at 4% net of charges:
- Withdrawing £25,000 a year leaves £488,000 after 30 years.
- Withdrawing £30,000 a year leaves £196,000.
- Withdrawing £35,000 a year depletes the pot after 28 years.
- Withdrawing £40,000 annually reduces the lifespan to around 22 years.
Careful planning and coordination can help pensioners avoid higher tax rates and make their savings last longer.
