TIPS FOR DIPPING INTO YOUR PENSION
Think about whether you have access to other funds before you consider tapping into your pension, for example, ISAS or other savings.
If you do dip into your pension, think about taking just some of the 25% tax-free cash available, especially if you are working and plan to continue to pay into your pension alongside your employer. This means you won’t trigger the additional restriction of the Money Purchase Annual Allowance.
Consider taking withdrawals over more than one tax year, as you may find you’ll pay less tax that way, especially if your withdrawals take you over the 40% income threshold, which is currently £50,270. Remember, this includes all the income you earn in a tax year, so salary as well as any pension withdrawals.
Use a free pension withdrawal calculator to work out the tax you are likely to pay, e.g. canadalife.co.uk/ customer-tools/pension-tax-calculator.
You can withdraw a small pot – up to £10,000 in value – without triggering the Money Purchase Annual Allowance restrictions. You can only do this with up to three smaller value pots over your lifetime and will need to cash them in completely. The usual tax rules still apply though, with the first 25% tax-free and the remaining 75% taxed.
HMRC often tax withdrawals using an emergency tax rate, which means you can pay too much.
Don’t wait till the end of the tax year to get back any additional tax you’ve paid on any withdrawals. There are simple forms you can complete to reclaim overpaid tax from HMRC, either online if you have a Government Gateway account, or via post.
Use the online service at gov.uk/ government/publications/flexiblyaccessed-pension-payment-repaymentclaim-p55 to claim overpayments of tax when you’ve flexibly accessed part of your pension pot, or complete form P55 or P50Z and send it to the tax office. If you have withdrawn a full small pot, you can also reclaim tax online or post forms P53 and P53Z to the tax office.
Find the forms and more information at gov.uk/government/publications/ income-tax-repayment-claim-whensmall-pension-taken-as-a-lump-sum-p53
If you are in any doubt, seek free guidance from Pension Wise, the Government service that offers impartial guidance around pensions. If you are aged 50 or over, book a free appointment either over the telephone or face to face.
Call 0800 138 1585 (Mon to Fri, 8am to 6.30pm) to book a face-to-face appointment. Or visit moneyhelper.org. uk to book a time for a telephone appointment. You could also contact a regulated financial adviser – find one near you via unbiased.co.uk or vouchedfor.co.uk.
Have a plan to put yourself back on track. Whether that’s to up your contributions as soon as you can afford to, or putting a bit extra away into an ISA to give you an extra pot of cash to help tide you over when you do retire fully.