How am I taxed?

Once you decide to start taking your pension, your provider should run an automatic test to tell you whether you are above the limit and, if so, how much tax you owe.

Every time you take more of your pension, your provider should give you a statement showing the percentage you have used up. 

Once you have withdrawn the full allowance, any further money you take triggers a tax charge. Your provider will deduct this from your pot on your behalf.

Do I have to pay tax on money that I don’t withdraw?

Yes. Once you reach the age of 75, your provider will carry out a test on the value of any untaken pension. This could push you over the threshold and the tax charge will be applied at a rate of 25pc, taken in one go.

This test means those who have saved into their pension as a way to pass their wealth to the next generation without paying inheritance tax – as IHT is not payable on inherited pensions – will still be caught out.

Beyond this, however, you will not be taxed on investment growth.

Can I reduce my tax bill?

You may be able to. Successive cuts to the threshold prompted HM Revenue & Customs to introduce protections. These allow savers who are close to, or have hit the lower limit, to apply for an exemption, retaining the higher limit.

Anyone with pension savings over £1m as of April 2016, when the cap was cut from £1.25m, can apply for one of two protections. 

“Individual protection 2016” keeps the lifetime allowance at the lower of either £1.25m or the value of your pension savings on April 5 2016. You can continue to save into your pension but must pay tax on any withdrawals beyond this protected threshold.