How your pension money is taxed…

Many expats will spend all of their working life building up a desirable pot of money to spend during their retirement years but might be unaware of hefty charges when it comes to pensions. This is why expats must be aware of these costs to avoid getting caught out later in life.

In this article, we have explored some easy ways to protect your retirement funds from unnecessary costs and how to future-proof pension pots so they can live a carefree retirement.


  1. Taking a 25% lump sum

Did you know that when you initially access your retirement savings, you can usually take a quarter of your total money tax-free. It’s also important to consider that if your pension allows you to, you can benefit from this tax perk by getting 25% tax-free and paying your marginal income tax rate on each withdrawal over the years. 

Furthermore, provided you are over 55 and have a defined contribution pension, you can take your tax-free entitlement whenever you like.

  1. Annual allowance limits

Annual allowance refers to the maximum savings a person can make yearly with a tax relief benefit. 

For example – in the 2022/23 tax year, the annual allowance is set at £40k or 100% of your earnings if you earn less than £40k (minimum of £3,600 gross). If you are a higher earner, the annual allowance limits the amount of tax relief you can claim on pension savings – by reducing the annual allowance to around £4k.

  1. Starting to dip into your pot

Did you know that if you start tapping a DB (Defined Benefit) pension pot for amounts over your 25% tax-free lump sum, you can only put away an extra £4k a year and automatically qualify for tax relief? This is also known as the money purchase annual allowance. 

Unfortunately, due to rising inflation rates, over 55s will more likely need to turn to their pension to cover rising living costs. It’s important to remember that all retirees who make a taxable withdrawal will ultimately have their pensions annual allowance cut from £40k to just £4k – with no turning back. They will also lose the ability to carry forward any unused allowances from the previous three years.

  1. Being wary of the different types of taxes

       a) Personal allowance and income tax

Most retirees will have a personal income tax allowance, meaning they don’t need to pay tax on the first £12,570 of their salary or rental income (specifically for the tax year 2022/23). It’s worth noting that if your yearly income is over £100,000, there might be a few factors that impact the tax you pay – including where you live in the UK and personal circumstances. Also, tax rules are always changing, so it’s advisable to keep up to date with the latest laws and regulations.

You can find information about income tax and personal allowance on the website.

        b) Inheritance tax

In simple terms, inheritance tax describes the tax payable on the estate (property, money and possessions) of a person who’s passed away. Usually, there won’t be inheritance tax to pay if: 

  • your estate’s value is below the £325,000 threshold
  • you leave everything above the £325,000 threshold to your spouse, civil partner,
    a charity or a community amateur sports club

Usually, this tax isn’t payable on your pension savings, but as will’s don’t always cover pension plans, it’s vital to let your providers know where you want your money to go after you pass away. It’s easy to do this, simply nominate the relevant beneficiaries and keep their details up to date. If you don’t do this, your providers will naturally consider your wishes in your will but ultimately are not bound by them. 

You can find all the information about inheritance tax on the website. 

        c) Emergency tax

As soon as you hit your retirement age, it’s advised to plan your income carefully for the first year to avoid HMRC imposing emergency tax. Emergency tax describes the tax code HMRC will operate against your employment or pension income until they have the information they need to calculate the correct code.

For example, if you happen to take larger sums of money from your pension pot over a few months, it might push you into a higher-rate tax bracket subjecting you to emergency tax. This is why it might make more sense to distribute your takeouts so you have a clear understanding of the tax you will be paying. 

  1. When taking an early retirement

If you have a defined benefit (final salary) pension, you might be subject to a penalty if trying to withdraw too early. Despite this, in some cases, it might be more worth it as you could have a reduction in income, which might put you in a lower tax rate bracket. It’s worth checking this with your advisory company, as you may want to access over savings first. 

  1. Understanding Lifetime Allowance

Lifetime allowance (LTA) describes the total amount of money you can build up in your pots without paying additional tax charges. For the 2022/23 year, this total is currently £1,073,100, and if you go over this, you will be subjected to a tax charge on the excess when taking income/withdrawing a lump sum.

This can be a more complicated area, and we have gone into a bit more detail about lifetime allowance (LTA) and how it may impact your retirement savings.


If you’re a UK expat living abroad in countries such as Australia, UAE, South Africa, or the EEA you can contact Brite Advisors for a free pension consultation. We offer an all-in-one pension management service, including investment advice, retirement advice, evidence-based investing, transfers, pension trustee administration, and asset management.

Find out more about Brite Advisors and get help from a qualified advisor:

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