Under flexible retirement rules, pension holders can generally take a portion of their pots tax-free, with the remainder subject to tax.
Figures have shown that some “retirement super pot” owners have been drawing an annual pension income of around £3m each.
HM Revenue and Customs (HMRC) data for 2023-24 indicates that the top 25 annual pension incomes averaged £2,982,000, rounded to the nearest £1,000.
The figures were obtained by Titan Wealth Planning through HMRC information. It was discovered that approximately 8,000 retirees, rounded to the nearest thousand, paid themselves over £100,000 from their pension pots in 2023-24.
Derek Miles, the chief executive of Titan Wealth Planning, has warned that high net worth individuals could face a significant increase in tax liability if they withdraw large sums from their pensions. He explained: “Assuming there were no other income streams, someone taking annual pension income today of £3m would be looking at an eye-watering tax bill of £1,336,202, leaving them with take-home earnings of £1,663,798.
“In other words, they would lose almost half their windfall. When you’ve spent a lifetime building a retirement super pot, it’s important to protect it by making the right type of withdrawal.”
The figures, which Titan obtained under Freedom of Information (FOI) rules, pertain to taxable flexible pension payments. Under the flexible retirement rules, pension holders can usually take part of their pots tax-free, while the rest is taxed. Mr Miles further commented: “There may be perfectly valid reasons why high net worth individuals may wish to draw seven-figure sums from their pots.”
“Perhaps they wish to invest in a business, buy a yacht to sail around the world, or they may simply want to help their children get a foot on the housing ladder. Leaving pension funds to children and grandchildren has become a central pillar of estate planning because of the tax advantages.”
According to calculations by Titan, a pension investor drawing £100,000 from a private pot could potentially face a £27,431 in income tax, assuming no other income streams. The size of the tax bill could also potentially hinge on whether someone receives the state pension, Mr Miles pointed out.
With flexible retirement rules allowing people to access their pensions from 55, while the state pension currently kicks in at 66, he noted: “If you’re still receiving employment income while drawing on your private pension, then this too will add to your tax bill.” He advised that individuals might want to consider seeking bespoke advice when planning their pension and estate.
