A common mistake students make in tax exams is the treatment of pension benefits.

The lifetime allowance for pensions is £1,073,100 so everyone can accumulate a pension pot of approx. £1M and pension contributions escape tax.

You are allowed to access your pension benefits once you reach the age of 55. You can take out 25% of the pension pot tax-free but the remaining 75% can be taken out as taxable earnings. Most people use the 75% to fund an annuity which gives them a fixed income every month for the rest of their lives. The monthly pension income is taxable based on the relevant income tax rates

At the point you access the pension, the value above £1,073,100 is taxable based on how the pension benefit is extracted.

If you take out the excess as cash, it attracts a very high-income tax charge of 55%. Alternatively, if the excess is used for a larger annuity, then the excess is taxed at 25%. So, if you are fortunate enough to have a pension pot of more than the lifetime allowance, it is better to take the excess out as an annuity to save 30% tax.

If you are planning on doing Tax or Advanced Tax, why not memorize the memory-joggers in my condensed notes and then start smashing through exam questions?

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