Lowes Magazine 122

PENSIONS

Pension withdrawal requires careful decisions Be wary of emergency tax on withdrawals Lowes Consultant Gershom Chan says:

ONE OF THE RECORDED RESULTS OF THE PENSIONS freedoms is the opening up of more options for people to consider, which has put retirees under immense pressure to make the right decisions, in particular when withdrawing money from their pensions. For many, it seems, the default after withdrawing money from their pensions is to put it into a cash account. This is fine if needed for a set purchase but with CPI inflation at 7% at time of writing, and expected to rise further during 2022, and cash account interest a fraction of that, as a longer-term strategy the money is losing spending power day-on-day. Even if the Bank of England looks to dampen the effects of soaring prices by increasing the interest ‘base rate’ further from the 0.75% set in March, high and rising inflation is likely to be in excess of any benefit a higher interest rate will give to the value of cash savings. Money is also being removed from pensions to invest in stocks and shares ISAs and into property. While these may offer better returns than saving into cash, removing any money from long term savings in a pension should only be done after taking into account long-term financial goals and capacity. These should include how much risk a person may be taking with their money and the tax consequences of pension withdrawals. Pension holders who may have withdrawn money during the pandemic, to meet their own financial needs or those of relatives, for example, may have found that they have been able to pay less into their pension going forward as a result. In addition, more flexible death benefit arrangements for pensions put in place in 2015 mean that pensions can be the best way to pass on wealth to beneficiaries and so often should be the last asset to be drawn upon when needing income or capital. We would recommend anyone thinking of withdrawing money from a pension only does so after seeking Independent Financial Advice.

A tax system anomaly which has been in existence since the pension freedoms were introduced in 2015, saw pension savers having to reclaim £42 million in over-taxation on pension withdrawals in the final quarter of 2021.

Figures published by HM Revenue & Customs show that a total of £800 million in overpaid tax has been refunded since 2015. The rules mean pension savers can withdraw money from age 55 in small amounts or as a lump sum but while this has created more flexibility around pensions, those who access their pot flexibly for the first time can be affected by an emergency tax code applied to the first withdrawal of the tax year. This is because HMRC view the sum withdrawn in the first month will be the amount that will be withdrawn every month throughout the year and they apply a tax code on that basis. Clearly, an upgrade of the tax system is needed but none is on the horizon so far. This issue is likely to be considerably larger than the published figures suggest, as some people do not realise they have been overtaxed and can reclaim the overpayment. It highlights the importance of getting Independent Financial Advice before touching your pension, both to plan your financial affairs properly and to reduce the risk of your money being handed to the tax authorities unnecessarily.

10 Lowes.co.uk