Hargreaves Lansdown warns on tax implications of withdrawing too much pension income

7th August 2014

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The Treasury is set to benefit from a windfall as a result of the new pension flexibility rules, based on an analysis of the Government’s recent Tax Information and Impact Note by Hargreaves Lansdown.

The firm suggests that the tax savings accruing to the government could amount to £3.8bn over five years as people take out more of their pension and potentially pay more tax. It says the increased tax take may be as follows from 2o15 through to 2o2o.

Tom McPhail, head of pensions research at Hargreaves Lansdown says: “Tax could easily wipe out a sizeable chunk of people’s pension savings potentially taking many people into the higher rate tax band who have never paid tax at that rate before. Trusting people to act responsibly with their pension savings is a huge step forward but it is essential to back this with the right guidance and advice.”

Hagreaves Lansdown has also calculated the tax implications at different levels of withdrawal below.

Basic rate taxpayer
Existing income

£20,000

Pension pot

£10,000

£50,000

£100,000

Tax free cash

£2,500

£12,500

£25,000

Residue

£7,500

£37,500

£75,000

Tax on pension pot

£1,500

£        10,627

£        25,627

Net pension pay-out

£8,500

£        39,373

£        74,373

Effective tax rate

15%

21%

26%

Higher rate taxpayer
Existing income

£85,000

Pension pot

£10,000

£50,000

£100,000

Tax free cash

£2,500

£12,500

£25,000

Residue

£7,500

£37,500

£75,000

Tax on pension pot

£3,000

£19,000

£34,500

Net pension pay-out

£7,000

£        31,000

£        65,500

Effective tax rate

30%

38%

34.5%

Additional rate taxpayer
Existing income

£155,000

Pension pot

£10,000

£50,000

£100,000

Tax free cash

£2,500

£12,500

£25,000

Residue

£7,500

£37,500

£75,000

Tax on pension pot

£3,375

£16,875

£33,750

Net pension pay-out

£6,625

£        33,125

£        66,250

Effective tax rate

33.75%

33.75%

33.75%

 

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