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magazineAvoid the pension freedoms emergency tax pitfall
As we enter the new tax year, a whole range of savings options and tax allowances once again open up to savvy investors. If you are over 55, you might also use this as an opportunity to review your retirement plans and consider your drawdown withdrawal strategy.
While for many taking a regular income stream and remaining invested will be the right option, others choose to take ad-hoc taxable payments from their fund. This might be to pay a child’s tuition fees, fund care for an elderly relative or splash out on a luxury Caribbean cruise.
Whatever your motive, if you’re going down this route you need to watch out for a pitfall which could see you hit with an unexpected tax bill running into thousands of pounds.
If you do nothing, you could have to wait 12 months (until the start of the 2019/20 tax year) to get your money back – and even then you’re relying on the efficiency of HMRC in sorting out your tax position.
WHAT IS THE PROBLEM
The problem can affect anyone who takes a taxable pension freedoms payment from age 55 – either through drawdown or via an ‘Uncrystallised Funds Pension Lump Sum’ (UFPLS) withdrawal.
In these circumstances, HMRC will require your pension provider to use an emergency ‘Month 1’ tax code. This means the Revenue only gives you 1/12th of the usual tax allowances available on the withdrawal, resulting in many savers being severely overtaxed.
For example, someone who makes a £2,000 withdrawal could be overtaxed by over £200, while someone taking out £10,000 could be overtaxed by over £3,000 (see tables).
HOW TO GET YOUR MONEY BACK WITHIN 30 DAYS
Unfortunately there is nothing you can do to stop HMRC charging you too much tax if you make ad-hoc pension freedoms withdrawals. You can, however, fill out one of three reclaim forms in order to get your money back within 30 days.
How you make a claim for any overpaid tax depends on the nature of the withdrawals you have made from your pension and your personal circumstances.
THE GOVERNMENT WEBSITE STATES:
If the payment used up your pension pot and you have no other income in the tax year, fill in form P50Z.
If the payment used up your pension pot and you have other taxable income, fill in form P53Z.
If the payment didn’t use up your pension pot and you’re not taking regular payments, fill in form P55. You can only use this form if your pension provider can’t refund you.
For more information visit:
www.gov.uk/claim-tax-refund/you-get-a-pension
Tom Selby,
senior analyst, AJ Bell
Important information:
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
