Excerpt from a YouTube video by Ndubuisi 'Andy' Egwim explaining UK pension withdrawal tax mechanics. The speaker describes the 25% tax-free lump-sum entitlement, then explains that subsequent pension withdrawals are taxed as income, with examples of using personal allowance (£12,570) or withdrawing amounts that attract lower tax bands (e.g., keeping withdrawals around £50,000 to remain in the 20% band).
Now the big question is, do you really pay that tax in the end? I think Emeka and I chatted about this. Emeka is in the mastermind, the gp. Many people who actually structure their finances very well because in the uk it's information, they eventually don't pay a lot of that tax. Why? Because when you withdraw your pension at the end 25%, you can withdraw tax free. Again, this is going a bit deeper into things, but most people get something called a lump sum. And if you withdraw 25%, imagine that at the end your SIP payout is £1,000,000, or let us say £400,000. You can take out a hundred thousand tax free, and then the next year, if you want to withdraw, you're going to be now taxed as if that's your income. So any money you're withdrawing after that is like your income. Guess what? Some people will be withdrawing £12,570, basically. So some other people withdraw 50k to keep their taxes at 20%. Some people might not need to withdraw more than 12, 570, because guess what, just because you are 57 doesn't mean you don't have other income. You might still have income coming in from your other investments or from work, if you're still working.
