Pension income paid to you is normally treated as earned income for income tax purposes, although you don’t pay any National Insurance contributions on your pension income. But bear in mind that you will normally be able to take some of your pension benefits (typically up to 25% of the value of your pension) as a tax-free lump sum at outset.
You should check each year that the correct amount of income tax has been deducted from the pension payments you receive, especially if you have other sources of income, such as a part-time or full-time job, bank or building society interest and/ or dividends or distributions from investments.
If you have had more tax deducted than you should have paid, you can reclaim the difference from HMRC. Similarly, you may also have to pay any tax that has been underpaid. If you need to reclaim tax when you’ve stopped working you can fill in claim form P50 and send this to HMRC. Alternatively, if you fill in a Self-Assessment tax return you can make the reclaim via this return.
If you’re a member of a defined contribution pension scheme and you’re looking to draw retirement benefits, you may have full flexibility on the amount that you can receive. This may include up to the total amount of your pension pot.
However, you should be aware that if you take substantial amounts from your pension pot you could become liable to pay higher rates of income tax (potentially up to 45% of the amount withdrawn, 46% in Scotland) so you may receive substantially less than the value of your pension pot.