23rd October 2014
Retirees withdrawing even very small amounts from their pension next April could find that they are hit with the highest rate of income tax according to analysis of draft guidance from HM Revenue & Customs.
NFU Mutual which conducted the research found that under the new pension rules, which come into play next April, pension providers will be instructed to use an emergency tax code on flexible withdrawals from pensions unless they receive a P45 or a tax code for the person making the withdrawal.
From next April, as a result of the overhaul of the UK pension system announced in this year’s Budget, retirees will be able to do as they please with their nest-egg and will not be ultimately forced to buy an annuity.
But many pension withdrawals could end up being taxed at a rate of 40% or even 45%, a level they many people may never have paid during their whole working life. Worse still, pensioners could find they may not be able to reclaim their overpayment until at least April 2016.
Commenting on the draft guidance, Sean McCann, chartered financial planner at NFU Mutual, said: “This is unexpected and will alarm people planning to cash in some, or all of their pension, next year. The new rules may make pensions more flexible and generally more attractive, but there are some pitfalls. People should be taking financial advice if they want to make the most of their money.”
In addition, McCann highlighted that there are still some unanswered questions which mean the tax consequences of accessing a pension from April 2015 without first making a plan or taking advice are likely to be significant.
He added: “Under an emergency tax code, a pension withdrawal would be treated as a monthly income even if there were no plans to make any more withdrawals during that tax year. Higher rate income tax of 40% would start to be paid on withdrawals as low as £4,700. The 45% rate, usually only paid on incomes above £150,000, would kick in for people withdrawing more than £17,834 in one go.”