17th October 2014
Retirees excited about the prospect of getting their hands on their pension cash next year under the new rules could find themselves lumbered with a large tax bill.
From April 2015 changes will be implemented to allow those aged 55 and over to access their pension money flexibly through ‘flexi-access drawdown’ or the ‘uncrystallised fund pension lump sum’.
Both options means pension savings can be taken as cash but for retirees planning on raiding their pension pots, NFU Mutual has warned of the tax consequences. Money taken from a pension is treated as income and is subject to income tax at a marginal rate: the first £10,000 of income earned or taken from a pension is tax-free, 20% is current paid between £31,865, 40% between £31,866 and £150,000 and 45% over £150,000.
NFU Mutual has said basic rate taxpayers could end up paying 40% or even 45% income tax if they take their entire pension fund at once.
The mutual insurer also warned it was as yet unclear how HM Revenue & Customs would collect the extra tax, and if it is collected upfront individuals would be forced to claim back any they are owed as the year progresses.
‘From April 2015, people who wish to flexibly access their pensions will be made aware of the tax consequences. However, we still don’t know how tax will be collected,’ said Sean McCann, chartered financial planner NFU Mutual.
‘If the taxman wants all the money up front, basic rate taxpayers may find that 40% or even 45% income tax on some or all of their withdrawals. The process to claim any overpaid amounts back could take months.
‘Alternatively, if only 20% tax is deducted at source, people may be expected to work out the tax they owe and keep enough money aside to pay the subsequent tax bill. Either way, many people will find they need to complete a tax return, some for the first time.’
There are two options that will be available from April 2015 both of which let you access as little or as much of your pension as you want but the tax treatment is slightly different.
Under flexi-access drawdown, pensioners take the first 25% of their fund tax-free (you might know it as the tax-free lump sum but it is technically known as the ‘pension commencement lump sum). The rest of the pension is taken as income and subject to income tax at a marginal rate.
Under UFPLS the tax-free lump sum does not need to be taken first. Each time a withdrawal is made, a quarter of the amount is tax-free and the remaining 75% is taxed at the pensioner’s marginal rate of income tax.