If so, 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. The total number who have been forced to reclaim overpaid tax since 2015 is now 116,784.”
How has this happened?
Under 2015 ‘pensions freedoms’ those aged over 55 can take regular or occasional sums from their pension pot. Any tax owed is collected by the pension provider; and here’s the crucial bit – 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) is the treasury department responsible for giving independent advice to the government, have recently published a report “Savings Income: routes to simplifications” (May 2018) highlighting the issue:
“When applying PAYE to pension income, an emergency code is often applied- which 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.
If you fill in forms you can get your money back within 30 days. However the concern is that, especially with smaller amounts, people will not even be aware that they have been overcharged.
Both individuals and wealth adviser should be aware of this unwanted consequence of the 2015 ‘pension freedoms’.
The adviser team at Tait Walker Wealth Management (TWWM) have been keen to 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 clients” 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’ and this ‘quirk’ in the tax system has arisen on a number of occasions.
What to do if you think you have 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 or if you have access online to your government Gateway account – register at gateway.gov.uk. If needs be a conversation with the tax office will guide you through the claim process.
How can you avoid the problem?
If your pension provider has an up-to-date tax code from HMRC, or a P45 from your final employer, you do not have to do anything to pay the right tax.
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.