‘Nasty shock’ – By overpaying thousands in taxes, retirees risk being “left with significantly less.”
TAKING a lump sum of money from one’s pension each year in retirement can lead to an emergency tax trap and increased taxes. Pensioners may owe thousands in unpaid taxes, leaving them with less money to spend on themselves.
Damien Fahy of The Money to the Masses Podcast highlighted how a pensioner paid an extra £5,000 in tax per year because he took his pension annually. This tax “quirk” should be known by those approaching retirement, since it can be a “nasty shock” if the money received isn’t what they expected.
“If you receive a lump payment from a taxable pension, you are basically put on an unique tax code called month one tax code,” he explained.
“It’s effectively an emergency rate tax, since you have to consider that if you have numerous pensions, you can have multiple tax codes for those pensions,” says the author.
“What happens is that HRMC doesn’t know how much tax you’ll pay, so when you withdraw money from your pension account, they assume you’ll be earning £25,000 per month for the following year, so they apply taxing based on that assumption, which is the emergency rate.””
Because HMRC expects the lump sum will be paid withdrawn monthly, resulting in increased income for that person, thousands of people have been taxed at the higher rate of 40% as a result of this emergency tax law.
This affects 30-40 thousand people each year who get lump sum payments from their pension but are unaware of the consequences.
Since the introduction of Pension Freedoms in 2015, more than £700 million has been overpaid in tax.
From the age of 55, customers can freely access their defined contribution pension accounts thanks to the Pension Freedoms legislation.
The money can be used for a variety of purposes, including cash withdrawals, retirement income products, or a combination of the two.
“People approaching retirement who want to take money out of their pension in excess of their tax-free lump sum may look at the amount of money that will be taken out and know their tax situation.”
“They believe that if I withdraw £20,000, it will be taxable yes – they’ll calculate their tax bill and what they believe it will be. “Brinkwire Summary News “..