UK’s Richest Retirees Earning $3.9 Million Annually From Their Pensions, Lose Half on Taxes

Britain’s richest retirees are earning as much as $3.9 million annually from their pensions, but nearly half of that is being lost to taxes, according to recent data. HM Revenue & Customs revealed that around 39,000 pensioners in the 2023-24 tax year withdrew taxable pension incomes of at least $64,960. Of these, approximately 8,000 took out $129,910 or more, and about 2,000 retirees earned at least $259,820. The average taxable income for pensioners stood at around $19,700 annually.

The data, obtained through a Freedom of Information (FOI) request, showed that the top 25 highest earners had an average pension income of $3,870,000, indicating that some are likely exceeding $3.9 million per year. A pension income of this level would result in an estimated income tax bill of around $1.7 million, assuming no other sources of income.

The figures are based on taxable flexible pension withdrawals made by one million pensioners in the 2023-24 tax year. Under the flexi-access drawdown system, savers can withdraw 25 percent of their pension pot tax-free, up to a limit of approximately $348,520, after reaching the age of 55. The remaining funds can continue to grow in a drawdown account and be withdrawn later, though these withdrawals count as taxable income.

Derek Miles of Titan Wealth Planning, which submitted the FOI request, noted that there could be valid reasons why high-net-worth individuals opt to withdraw seven-figure sums from their pensions. He suggested that some might wish to invest in a business, purchase a yacht for global travel, or provide financial assistance to their children, particularly in helping them enter the housing market. However, he warned that large withdrawals significantly increase tax liabilities, potentially reducing the amount available to pass on to the next generation.

There are indications that Rachel Reeves is considering reducing the tax-free lump sum limit to $129,910 ahead of the upcoming Budget on October 30. Both the Institute for Fiscal Studies and the Fabian Society have advocated for a cut in the tax-free allowance, arguing it would generate an additional $2.6 billion in revenue for the Treasury. However, this proposal may be seen as yet another blow to pensioners following the Chancellor’s earlier decision to cut winter fuel payments.

Ian Cook of wealth management firm Quilter emphasized that the tax bills associated with large pension withdrawals highlight the importance of the tax-free lump sum.

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