Q: I’m 55 and looking into my plans for retirement. I want to cash in part of my defined contribution pension pot worth £60,000 but I’m confused about tax. How much can I take out of my pension pot tax-free and how much tax will I pay on the rest?

A: Pensions are taxable income, but special rules mean you can usually take up to 25 per cent of your pension pot tax-free.

You can take your 25 per cent tax-free lump sum out of your pension in one go. For your pension pot of £60,000, if you take a 25 per cent tax-free lump sum you’ll get £15,000 tax-free. For the other £45,000, you’ll need to decide what you want to do. There are various options. You can buy an annuity, which gives you a guaranteed income for life. Or you can go for an adjustable income. This means your pot is invested to give you a regular income. You decide how much to take out and when, and how long you want it to last.

If you don’t want to take your 25 per cent tax-free lump sum in one go, another option is to take multiple cash lump sums. If you do this, you will get 25 per cent tax-free of each lump sum. For example, if you were to take £1,000 per month out of your pension, £250 would be tax-free. The remaining £750 is taxable.

How much tax you pay on the rest of your pension will depend on how much you “earn” in any one tax year. This includes your state pension and some earnings from investments, such as property or savings. If your total income is less than your personal allowance you won’t pay any tax. The personal allowance for most people is currently £11,850, rising to £12,500 next April. If your total income is above the personal allowance you’ll be taxed at 20, 40 or 45 per cent as usual.

Don’t rush into any decisions. Above all, don’t pay any attention to unsolicited phone calls offering you apparently attractive ways to invest you pot. They will at best be poor value and at worst outright frauds.

Find out more about your options from Pensionwise. This is a free, independent service, provided by the government. You can contact them via their website or phone for a free appointment on 0800 138 3944.

  • Citizens Advice Epping Forest is available to provide you with help and support. For further help and advice, contact your local Citizens Advice.office or phone the Essex Adviceline on 03444 770 808.