Pension Raiders Face Hefty Tax Bill
March 11th, 2015
For those of you thinking about cashing in your whole pension in April, you may be hit with an immediate unwanted tax bill of up to a third of your savings. The Telegraph have published an article explaining why this inconvenient tax bill may affect more people than you think.
“Most savers who cash in their pension from April will lose a third of the money to tax and have to claim back thousands of pounds, experts have warned.
Analysis for The Telegraph suggests more than 80,000 savers could be hit by unwarranted tax deductions on pension withdrawals over the next year.
Under George Osborne’s flagship reforms, which are fewer than six weeks away, savers will be able to cash in their pensions from age 55.
People will be expected to provide a tax code printed on official correspondence from HM Revenue & Customs or their employer to have the correct rate of tax deducted.
However, pension providers say in “most cases” they expect to use an emergency code that results in savers being taxed as if they were among the highest earners.”
The article goes on to explain:
“Savers who cashed in the average pension pot of £30,000 would lose £8,900 to the taxman, almost a third of their fund, and would need to claim money back. The deduction would leave a 20 per cent taxpayer £4,400 out of pocket.
Adrian Walker, from Old Mutual, said: “This is a pitfall many individuals are likely to fall into – they could be left with less than expected when taking pension income.”
Kate Smith, of Aegon, another pension firm, said: “In most cases people will pay an emergency tax rate on the payment and then have the option to reclaim the overpaid tax immediately, or wait until HMRC makes the adjustment the following April.”
People who want to avoid the problem should contact their employer or HMRC and ask for a document confirming their tax code. Before any money is withdrawn from their fund, customers should submit a copy of the letter to their pension provider and ask it to use the code when calculating tax deductions. Under the reforms, savers will be able to withdraw a quarter of their pension fund free of tax. When the rest is withdrawn it should be subject to ordinary income tax, which for most pensioners will be 20 per cent.”
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