Tax planning for teachers at retirement

During your career, tax planning is often about finding efficient ways to save for retirement. But what about when you have retired?

There are a number of tax considerations for teachers in retirement, particularly when you start to draw your pension. Some of these considerations are explored below – along with a look at how ‘pension recycling’ could maximise tax relief.

Tax treatment depends on your individual circumstances and may be subject to change in the future.

Tax considerations for teachers in retirement

If you’re part of the Teachers’ Pension Scheme (TPS), you may automatically receive a lump sum at retirement (or be given the option of taking a lump at least), alongside your regular pension benefits.

While this lump sum can usually be taken tax free, the monthly pension income you receive into your bank account is subject to income tax – just like when you were taking a salary. Any other private pension or state pension income you have is taxed the same way, so managing your income is important to avoid higher tax brackets and bills.

Managing your lump sum

The receipt of a lump sum will often be the biggest single amount of money you have ever received. While the amount itself is tax free, what you choose to do with it may incur tax.

For example, if you are a basic rate taxpayer and you choose to put the full amount into a standard savings account, you would be taxed on any interest earned above £1,000. An ISA on the other hand would protect your savings from tax.

If you’re about to receive a lump sum or you will in the future, it may be worth speaking to a Specialist Financial Adviser from Wesleyan Financial Services. They will be able to explain any tax implications and help you to plan accordingly. Advice charges may apply.

Managing your regular pension benefit

If your annual pension income exceeds your personal allowance, you will pay income tax on it. The standard personal allowance for the 2025/26 tax year is £12,570. If your regular pension benefits exceed this amount, you will be taxed according to your tax band.

Your TPS statement will provide further detail on how much pension benefit you will receive. If this amount is above the standard personal allowance or will push you into a higher tax band, there are things you can do to reduce your tax bill. This includes taking a bigger lump sum to reduce your monthly pension benefit.

If you want to understand how much you could reduce your pension benefit by, as well as what you can potentially increase your tax-free lump sum to, it may be worth booking an appointment with our Education Support Team.

If you want to explore more options for maximising the amount of tax relief you can claim, you could consider pension recycling.

What is pension recycling?

Pension recycling is when you choose to withdraw some of your pension and then reinvest it in the same pension or another scheme to potentially gain further tax relief.

Some retirees may choose to use pension recycling to reinvest some of their pension to generate an additional tax-free allowance, thus, protecting their hard-earned cash in retirement.

While pension recycling can be a useful tool to invest more while saving on tax, there are strict rules around its use.

If you’re considering reinvesting cash into your pension pot, it may be worth seeking advice from a Specialist Financial Adviser from Wesleyan Financial Services. If you’re looking for advice on other types of investment, an Adviser may also be able to help.

Remember the value of investments and any income can go down as well as up, so you could get back less than you invest.

Take a proactive approach to inheritance tax planning

If you plan on passing on your wealth to someone in your later years, including a family member, there is also inheritance tax (IHT) to think about.

IHT applies to any person in the UK whose total estate value is more than the basic threshold. The threshold or nil-rate band is currently set at £325,000 per UK adult. This means that any estate valued at more than this amount will likely be subject to IHT.

Pensions are currently exempt from IHT. However, from April 2027, any unused pension pots will be included in IHT calculations as part of your estate.

Reducing the amount of IHT payable can usually be achieved through proactive planning. If you have a spouse or civil partner, you can double your nil-rate band threshold. This means that, dependent on your circumstances, you may be liable from £650,000.

If you want to use part of your lump sum to treat your family now, your estate will not be liable to pay IHT for anything you have gifted seven or more years prior to your death.

Our guide to inheritance tax planning provides further information and useful insights on IHT, as well as when and where it may become payable.

Please bear in mind that advice in relation to inheritance tax planning is not regulated by the Financial Conduct Authority.

If you want to learn more about tax planning at retirement and receive advice tailored to your circumstances, it may be worth speaking to a Specialist Financial Adviser from Wesleyan Financial Services.