Aren't savings better than pensions as they don't count as part of your income?

22 May 2023

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Question by janice

The tax relief on money put into a pension pot is taxed as part of your income when you take it out - so aren't savings better as they don't count as part of your income?

Answered by Tanya Laing

Dear Janice

You are right in saying a pension may be taxed as part of your income when you take it out. You can usually take up to 25% as a tax-free lump sum. (This is limited to a maximum of 25% of your available lifetime allowance. For most individuals, this is currently £1,073,100). After this, the rest is taxed at your usual rate of income.

Savings, if they are part of an ISA, will not be taxed as part of your income.

However savings, outside of ISA is taxed as savings income. You may be eligible for a personal savings allowance, but you will pay tax on any interest over this allowance at your usual rate of Income Tax. You will pay this tax every year, not just when you take your savings out. So when you come to using your savings, you've already paid the tax - which makes it feel a bit like it's tax free!

You also have a personal allowance of £12,570. Earnings below this are tax free. So, it makes sense to have a mix of retirement options - both from savings and pension. This way you can structure your retirement income to pay the least amount of tax you can when accessing them.

I hope this helps

Answered by

Tanya Laing

Chartered Financial Planner

I want to get people talking more comfortably and openly about money. Debunking that thought that ‘I don’t understand finance’ is my passion. I enjoy talking to people and understanding their story - because it is this individual story that is the foundation of financial advice. Oh, and also – no jargon. Just a friendly, collaborative approach to give more confidence, clarity and peace of mind to your personal finances.