Almost one million people over the age of 55 have landed themselves with an unexpected tax bill by inadvertently triggering a big cut in their tax-free pension savings allowance when dipping into their retirement funds, pensions experts have warned.
Figures released by UK tax authorities reveal that 980,000 over-55s who took advantage of new pension spending freedoms between 2015 and 2018, caused an irreversible reduction in their annual pension tax relief allowance from as much as £40,000 to as little as £4,000. Experts fear that many savers who took cash from their pensions are unaware that their tax relief limits have been slashed.
Savers who have paid more than their annual allowance into their pensions are subject to tax charges at their top marginal rate on the excess. For example, A 57-year-old higher-rate taxpayer who triggered a cut in their annual allowance to £4,000 could be landed with a £2,400 tax bill if they made £10,000 in contributions into their pensions the following year, including any employer payments.
Richard Jacobs Pensions, based at Lymedale Business Park, provides personal pension advice and administers workplace pension schemes.
Director Emily Small said: “Recent changes, often termed as pension freedoms, have led to more people than ever before saving for their retirement. Whilst this can be seen as positive, many savers are in danger of being caught out by the UK’s complex rules about how and when they can take their money.
“New figures from the HMRC show that people need to be careful about how and when they take their pension and should seek independent financial advice.”
The figures were released following a freedom of information request by Just Group, a British company specialising in retirement products. It is the first time that the pensions industry has had an indication of the number of individuals affected by a reduced tax-free threshold, called the money purchase annual allowance, introduced in 2015 alongside reforms that gave over-55s full freedom to spend savings held in a “defined contribution” pension as they wished.
The reduction in allowances was intended to prevent people using the new pension freedoms to recycle money through a pension and effectively receive additional tax relief on those savings. It means anyone who withdraws taxable funds from certain types of pensions, can only subsequently put in new savings of up to £4,000 a year without incurring a tax charge. This is way less than the standard £40,000 limit for tax relief.
To find out more about Richard Jacobs Pensions please go online to www.jacobs-pensions.co.uk.
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