Pension withdrawals incur an increased tax bill from HMRC that is more than you should really owe. Nevertheless, this is tax you will have to pay, and reclaim any excess later.
This can be complicated and time-consuming process of form-filling and waiting, as HMRC tends to move at a leisurely pace. Claims usually take at least six weeks, but with the changed working practices brought about as a result of the pandemic, cash-strapped individuals may end up waiting many months to recover money that is rightfully theirs. Why does this happen? HMRC assumes you will make regular pension withdrawals of a similar size throughout the year and use this to calculate your tax band. So, if you make a single withdrawal of £30,000 from a pension pot in June, HMRC assumes you will do this regularly throughout the year, and so will put you in the higher-rate tax band paying 40 per cent tax (even though your actual income is nowhere near this band). You will therefore initially pay 40 per cent rather than 20 per cent tax on all your income and must put in a request to recover the excess later. Over £600m of tax has been overpaid and reclaimed by people making pension withdrawals since 2015. As a result, they should be paying less tax on these withdrawals. But HMRC is going to carry on taking the same amount of tax upfront as it has always done.’ It’s worth bearing in mind that 25 per cent of any pension pot can be taken as a tax-free lump sum, so people who are in genuine financial difficulties with no alternative courses of action may consider this a possible option. But those considering taking taxable lump sums should tread very carefully indeed, and never act without taking financial advice. Employers – what can you do to encourage employees to think about their retirement? If you don’t have a Financial Adviser assisting you with your workplace pension scheme, speak directly to your pension scheme provider who will have a wide range of literature and promotional material for the pension scheme and that is free to access If you have a Financial Adviser assisting you, ask them about any promotional services that they may offer such as retirement planning seminars for the over 50s and individual one-to-one meetings for employees. Any employers, employees or the self-employed who are concerned about their pension savings, or simply haven’t had their retirement planning reviewed for a long time should talk to a financial adviser. The current situation may be unusual, but independent advice remains as valuable as ever. Contact us At MHA Tait Walker Wealth Management, we are passionate about supporting our clients with their financial goals. We have over eighty years’ experience in providing our clients with high quality wealth management and tax services from investment advice to pension planning. As we are independent, we can offer financial products without bias or obligation and our 70-strong Wealth Management and Tax Team work together to provide specialist advice.
