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Topic Personal Pension: Taxes

Personal Pension: Taxes

How do taxes work for the Personal Pension?

There are three kinds of Personal Pensions: a Traditional IRA Personal Pension, a Roth IRA Personal Pension, and a standard (non-qualified) Personal Pension. They differ in where the money you use to fund your Personal Pension comes from and the the taxes you pay once you start receiving your monthly paycheck.

Personal Pension: Taxes

Should I purchase my Personal Pension with pre-tax or post-tax money?

If you have an existing IRA or 401(k) Rollover that you would like to transfer to something guaranteed, then it makes sense to fund it with that pre-tax money. If you haven’t maxed out your IRA for the year, then you can apply those limits to your Personal Pension and fund it pre-tax. Otherwise, if you want to save even more than what’s allowed pre-tax, then the Personal Pension is a great post-tax retirement plan.

Personal Pension: Taxes

What taxes will I owe in retirement?

The taxes you’ll pay on Personal Pension income depend on how you funded your Personal Pension. If it’s funded as a Traditional IRA, income payments will be fully taxable at ordinary income rates. If you funded it as a Roth IRA, no taxes will be owed. If you funded it with regular after-tax savings, then you’ll only owe taxes on the “gain” in the pension.

Personal Pension: Taxes

How do taxes work for a standard Personal Pension?

Standard Personal Pensions are non-qualified in that they are funded with money from your savings, checking or brokerage account. These Personal Pension deposits don’t count towards your IRA limits, so you can contribute as much as you want. Because you have already paid taxes on the money deposited into these accounts, you will only pay taxes in retirement on the portion of the income payment that constitutes a gain.

Personal Pension: Taxes

How do taxes work for a Roth IRA Personal Pension?

Similar to your Roth IRA account, you contribute after-tax money to your Personal Pension and the income payments you receive during retirement are tax-free.  

Personal Pension: Taxes

How do taxes work for a Traditional IRA Personal Pension?

Taxes for a Traditional IRA Personal Pension are just like those for your Traditional IRA account. You use pre-tax money to fund your Personal Pension, and you are fully taxed at the ordinary income tax rate on the monthly payments you receive during retirement.

Personal Pension: Taxes

How is the "gain" on a Personal Pension calculated for tax purposes?

If you funded your Personal Pension with standard post-tax dollars, then you’ll be taxed on a portion of the income you’ll receive in retirement. Each income payment can be split into two pieces: a part that’s returning your initial investment, and a part that’s your “gain” or interest earned. Taxes will only be owed on the “gain,” as the contributions you made into the contract has already been taxed. This non-taxable portion of the income payment is determined using an exclusion ratio, which is provided by the insurance company at purchase.