MONEY MAT­TERS

AJ Bell ex­pert Tom Selby has the an­swer to this ques­tion

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Why am I be­ing taxed so much on a pen­sion with­drawal?

Steve from Stroud Last month I took a £20,000 un­crys­tallised funds pen­sion lump sum (UFPLS) pay­ment from my pen­sion to pay for ren­o­va­tions to my house. I don’t have any other in­come so as­sumed I’d only pay tax of about £1,700.

How­ever, I’ve just re­ceived my pay­ment and it’s less than £13,000 – can this pos­si­bly be right?

Un­for­tu­nately it sounds like you’re one of tens of thou­sands of peo­ple to fall foul of the pen­sion free­doms tax trap.

Un­der Govern­ment rules any­one who ac­cesses their re­tire­ment pot for the first time us­ing the pen­sion free­doms is taxed on a ‘Month 1’ ba­sis.

This is an emer­gency tax code and means you re­ceive 1/12th of your usual tax al­lowances.

So while nor­mally you’d ex­pect any in­come be­low £11,850 to be tax-free, where Month 1 is ap­plied this re­duces to just £987.50.

Sim­i­larly, the size of your ba­sic-rate tax band drops from £34,500 to £2,875, while the higher-rate band falls from £115,500 to £9,625. Any in­come be­yond this will be taxed at the ad­di­tional rate of 45% un­der Month 1.

All of that means your hard­earned pen­sion risks be­ing hit with sig­nif­i­cantly higher tax charges than you would nor­mally ex­pect.

It’s worth not­ing this doesn’t af­fect ev­ery­one who ac­cesses their pen­sion flex­i­bly. If some­one takes a reg­u­lar in­come or mul­ti­ple pay­ments from their fund in a tax year then HMRC should be able to rec­on­cile their tax po­si­tion with­out them do­ing any­thing.

In your case, how­ever, the best way to be ab­so­lutely sure you get the pen­sion you are owed is by fill­ing out the rel­e­vant Govern­ment re­claim form. You can find these forms here: www.gov.uk/claim-tax-re­fund

If the with­drawal used up your en­tire pen­sion pot and you have no other in­come in the tax year, you need to fill in form P50Z.

If the pay­ment used up your fund and you have other tax­able in­come, fill in form P53Z.

Fi­nally, if the pay­ment didn’t use up your pen­sion pot and you’re not tak­ing reg­u­lar pay­ments, fill in form P55.

The good news is once you have filled out the ap­pro­pri­ate form HMRC should re­fund you within 30 days. How­ever, if you do noth­ing then there is no guar­an­tee when your money will be paid back to you.

Tom Selby, AJ Bell se­nior an­a­lyst, replies:

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