16th October 2017
Pension withdrawals and how to avoid paying unnecessary tax
Pension freedoms introduced in 2015 have given people greater options for accessing their pensions early and in more flexible amounts. However, if you do decide to withdraw funds from your pension, it’s important to do so in the most tax-efficient way possible.
Understanding the implications of pension withdrawals
Depending on your pension scheme, the type of withdrawal you make and how much you take out, you will probably have to pay tax on some or all of the withdrawal.
Then there’s the thorny issue of tax codes. When you withdraw money from your pension pot for the first time, there’s a good chance your pension provider will use an emergency tax code, especially if you’ve withdrawn a large sum. This means you’ll be paying much more tax than necessary.
Taking steps to make sure you don’t overpay tax
The first step to avoid paying too much tax is to not make unnecessary withdrawals. While pension freedoms are great, it’s important to remember that (in the eyes of HMRC) pension withdrawals are income and will be taxed accordingly. So don’t go taking money out of your pension pot unless you really need to.
If you do access your pension funds, check with your accountant or financial adviser that you’ve been taxed appropriately. If your pension provider has used an emergency tax code, you’ll need to reclaim the extra tax at the end of the tax year through the Self Assessment system.
Ultimately, it’s a case of making sure you withdraw the right amount, from the right pot of money, at the right time. But what’s ‘right’ isn’t always obvious, so professional advice is a must. We work with our clients to assess all the available options, including the different types of income that can be withdrawn from a pension, as well as other savings and income.
The Ascot Lloyd team is here to ensure you make the most of your pension, income and savings. Get in touch to discuss your individual circumstances with one of our experts.