Freedom Comes At A Price

One of the benefits of writing this every week is I am able to highlight any key issues as they happen (almost).

As the title of this week’s blog suggests, the wonderful new pension freedoms we have been banging on about for what seems like forever, have raised a few practical issues.

Both HMRC and pension providers such as Standard Life have faced unprecedented numbers of calls because of the complexity around the taxation of lump sum withdrawals.

Put very simply, if you would like a lump sum withdrawal from your pension you will, in most cases, be hit with a large tax bill, which you will then have to reclaim from HMRC.

This does not apply if you have tax-free cash available, but for larger withdrawals it may be the case that it is a combination of tax-free cash and income.

The reason for this is quite complicated but essentially HMRC have issued guidance to pension providers to make sure that the correct tax is paid.

This guidance means that your withdrawal will be treated as if it is your monthly income, as taxed as such.

We have seen one client this week that required a withdrawal of £30,000 net, which meant he would have to make a withdrawal of £52,500 (tax of £22,500 approx).

The client will then have to complete HMRC form P50Z, P53Z or P55 to reclaim the overpaid tax.

This is going to be a major problem as this client now has taken almost double the amount from his pension that he intended, however as per the Flexi Access Drawdown rules his annual contribution allowance has been reduced to £10,000 p.a so he cannot just put the excess back in once received from HMRC.

The other problem is that as advisers we cannot just take client instructions to make a withdrawal.

We have to complete an assessment of your situation, objectives and suitability for a withdrawal, highlighting the associated risks.

This is not so much of a problem for our clients that we see on a regular basis but for those we don’t and the wider public who don’t have advisers, it will be.

Again I would ask that you share this with any friends and family you feel would benefit from this information.

I would be delighted if you could leave any feedback, questions or comments here.

This email is not intended as advice as should not be treated as such.