Taking pension cash – have you been overcharged?
If you’ve been overcharged from taking pension cash, it could take you 12 months to get your money back
Experts warn that drawing cash from your pension could result in the tax man taking thousands more than is due.
This from Gareth James, head of technical resources at Investment Platform, A J Bell.
Amounts quoted in a “WHICH” report (May 2018) that “more than 10,000 people have claimed back overpaid tax on pensions just in the last quarter, with the average claim coming to £2,400. Since 2015, 116,784 people have been forced to reclaim overpaid tax.”
How has this happened?
Under 2015 ‘pensions freedoms’, those aged over 55 can take regular or occasional sums from their pension pot. The pension provider collects any tax owed. IF HMRC DON’T HAVE AN UP TO DATE TAX CODE FOR YOU – they have to impose emergency tax.
It’s apparent that the system needs overhauling. The Office for Tax Simplification (OTS) have recently published a report “Savings Income: routes to simplifications” (May 2018). This report highlights the issue.
When applying PAYE to pension income, an emergency code is often applied. This operates on the basis that this sum will be received every month. In most cases taxpayers will over pay tax. The report says; “a lump sum may represent many years’ worth of pension income so higher rates of tax may be deducted on the basis of an emergency coding.
Tom Selby, senior analyst at AJ Bell quotes: “Tens of thousands of people using the pension freedoms every month risk falling into this tax trap. Anyone who makes an ad hoc withdrawal and doesn’t fill out the right form to claim the money back will have to wait until at least April 2019 to get their money back.”
You can get your money back within 30 days if you fill in forms. However, there are concerns that people will not be aware that they’ve been overcharged.
Both individuals and wealth advisers should be aware of this unwanted consequence of the 2015 ‘pension freedoms’.
The team at Tait Walker Wealth Management (TWWM) ensure that their clients are aware of the potential pit fall.
“When our clients are going into drawdown or taking lump sums ,we discuss this with them” Mark Parkinson, TWWM Partner explained.
The company advise clients in all areas of wealth management; “We have seen increasing numbers of people taking advantage of ‘pension freedoms’. This ‘quirk’ in the tax system has arisen on a number of occasions.”
What to do if you think you’ve been overcharged
You will need to contact HMRC and fill in a relevant repayment claim form. There are different forms for different scenarios. They are available to download at Gov.uk. If you have access online to your government Gateway account – register at gateway.gov.uk. A conversation with the tax office will guide you through the claim process if needed.
How can you avoid the problem?
You do not have to do anything to pay the right tax if your pension provider has an up-to-date tax code from HMRC or a P45 from your final employer,
Ensure you get the right advice
Tait Walker Wealth Management are based in Gosforth, Newcastle upon Tyne and provide specialist advice on all aspects of financial planning to Personal and Business clients. www.taitwalker.co.uk.
Any tax treatment depends on the individual circumstances of the client and is not regulated by the Financial Conduct Authority.
All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change, and are pendent on your individual circumstances.
Tait Walker Wealth Management is a trading style of Tait Walker Financial Services Ltd who is regulated and authorised by the Financial Conduct Authority.