We are all now well aware of the pension freedoms that come in to play from April 2015. There is expected to be something of a stampede of people accessing their pension funds post-April, utilising these rules to plunder their pension savings.
Individuals expect that they can withdraw funds and pay the appropriate level of Income Tax on these payments. However, complicated HM Revenue & Custom rules mean that those withdrawing money early in the tax year may initially overpay a significant amount of tax, with the consequence of then having to apply for a refund from the taxman. The alternative to this is to wait until the end of the tax year for the tax to be calculated correctly.
Because of the way the Pay As You Earn system works, those taking out a lump sum will be taxed as if they are going to maintain this level of ‘income’ for the remainder of the tax year.
This may result in significantly higher tax being paid, possibly to as high as 45%, but can also remove the tax-free Personal Allowance.
Consequently, those who are withdrawing funds out of their pension for a specific reason, requiring an exact amount, may actually receive a lot less than they anticipated, and far too little for their needs.
You must therefore factor this in to any decision that you make regarding making withdrawals post-April from your pension funds. Contact us first if you are thinking of taking advantage of the new pension freedoms.
Scott Burkinshaw
Scott is Tax Partner at Shorts, specialising in providing strategic corporate and personal tax advice.
View my articlesTags: Private Client, Business Taxes
