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Income tax in retirement

Find out how your benefits and savings will be taxed when you’re receiving them in retirement

Understand how income tax on your pension will be calculated

Your pension is a tax-efficient way of saving for your future. You get tax relief while you’re paying in, which means your contributions are tax-free (up to certain limits).

Once you retire, you’ll be taxed on the pension you receive. Your tax code, provided by HMRC, will be used to tax your income in retirement. The amount of income tax you pay on your USS benefits will also be determined by any income you earn from other sources.

You’ll pay income tax if your total annual income adds up to more than your Personal Allowance, and this income could include:

  • Any State Pension you receive
  • A private pension, such as a personal pension or a workplace pension like the one you’ve built up with USS
  • Employment or self-employment earnings
  • Any taxable benefits you receive
  • Any other income you may receive from sources such as savings, investments or property

You can find out more about your income tax Personal Allowance on the MoneyHelper website.

How your Retirement Income Builder benefits are taxed

If you joined USS on or after 1 April 2016, and if you have paid in to USS since then, you’ll have automatically started building benefits in the Retirement Income Builder – the defined benefit part (DB) – by contributing part of your salary up to the salary threshold.

These benefits provide you with a guaranteed income for life in retirement and the pension payments you receive will be subject to income tax, just like a regular income.

You also have the option to take a one-off cash lump sum of three times your pension from your Retirement Income Builder benefits when you retire. You can also choose to have a higher monthly income and a lower cash lump sum - or vice versa. It’s up to you.

The one-off cash lump sum is tax-free up to a certain limit. The limit is explained in the retirement quote you’ll receive from us, and you can use our Benefit Calculator in My USS to see how taking more or less tax-free cash will affect the rest of your benefits.

If you were a USS member before 2016, you would have built DB benefits in a different way to how they’re now built in the Retirement Income Builder. However, they will still be subject to income tax when you receive them.

Please note: If you flexibly retire, you’ll start receiving a proportion of your Retirement Income Builder benefits – the defined benefit part (DB) – while continuing to work at reduced hours and salary, as agreed with your employer.

As you’ll remain in work, you won’t be provided with a P45 when you start receiving your pension. This means the 0T Month 1 tax code will be used to tax the pension you receive until HMRC issues a notification of a new tax code. Once the new tax code is in place, any adjustments will be made to your income tax.

If you have any questions, contact HMRC directly on 0300 200 3300.

How any Investment Builder savings are taxed

The Investment Builder is the defined contribution (DC) part of USS. Since 2016, you’ll have contributed to this if you earned over the salary threshold while paying in, or if you've made additional contributions or transferred in savings from another pension scheme.

You don’t need to take these savings at the same time as your Retirement Income Builder benefits, but you can do if you wish, and how you take them will affect how they’re taxed.

You’ll have a range of options to access your DC pot, and in most cases you can start using it from age 55 onwards (rising to 57 in 2028 for certain members) if you wish. You can find out more about your options on our using your Investment Builder pot page.

There may be other tax implications you should be aware of before accessing your Investment Builder pot, such as the Money Purchase Annual Allowance which is triggered by some of these options.

If you take both your Retirement Income Builder benefits and Investment Builder savings together then, depending on the size of your pot, you may be able to take all of your Investment Builder pot as part of your tax-free cash lump sum when you retire.

If your Investment Builder savings make up more than 25% of the overall value of your benefits at retirement, you can still take some as tax-free cash and the rest can be taken when you decide in line with your chosen options.

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