‘HMRC is charging me £2k for £10k pension withdrawal’

QI have been reading your articles recently in The Telegraph and was wondering if you could help me with an issue I have had while removing some funds from my separate personal pension pot, funds that should relate to my tax free element.

I am 72 and semi-retired. In addition to my state pension and previous company pension, I receive a retainer for some consultancy work I do for a few hours per week for a small engineering company.

In addition to this, I have a separate personal pension pot that was built up from previous company pensions and AVCs over many years, which amounts to around £410,000.

I have only accessed this pension pot once before to remove £40,000 about six years ago to help my son get on the housing ladder, and this amount was paid tax free as part of my 25pc tax-free allowance.

My pension pot at that time of withdrawal was split into crystallised and uncrystallised. Late last year I needed some extra funds to pay for some roof repairs, so I withdrew £10,000 believing this would also be paid tax free as it was within the tax- free amount allowed. However, to my shock I have now been taxed on this sum.

I have written to HM Revenue and Customs twice now detailing the problem as best I can, including completing a pension payment claim form, but they are holding firm on the tax and are deducting this amount, now approximately £ 2,000, from my company pension over next few months.

My pension pot is with Interactive Investor, which has told me it is powerless to do anything with HMRC.

So the question I am asking is how do I resolve this situation with HMRC and, more importantly, stop it from happening again, as I am sure this is not an uncommon issue?

Any advice or assistance you can give me would be gratefully appreciated.

– James

Dear James

AOn the face of it, I completely understand your confusion. With a pot size of around £410,000, you should have around £ 100,000 available to you as a tax-free lump sum.

You do also mention an old company pension and I am wondering what the value of this one is, how much income it is generating and whether you have taken any lump sums from this, too.

Assuming that you haven’t ( or you would have mentioned it), it is quite possible that the problem here is simply that you might have accessed the cash incorrectly.

The process for accessing extra taxfree cash is usually that you crystallise funds from the uncrystallised part of your pension, to make more tax- free cash available. So you would crystallise a further £40,000 to then be able to take that additional £ 10,000 tax- free cash. If, instead, you simply took £10,000 out of the already crystallised part of your pension, this would be taxed as income.

What’s more, if it’s the first one- off income withdrawal, this might also have been subject to emergency tax, if Interactive Investor didn’t have the correct tax code for you. If a pension provider has the current P45, then it can deduct the right amount of tax.

According to the guide to withdrawals on Interactive Investor, you can select whether you are taking a tax-free lump sum or taxable income. It’s possible that the wrong box was ticked, or the form might have been processed incorrectly.

If this is what has happened, perhaps the reason you haven’t got anywhere with HMRC is that you are just talking at cross purposes – as far as they are concerned, you took some income from your crystallised pot and therefore face a tax bill.

The next step for you is to go back to your provider and explain what you think has happened. If you did make an income withdrawal rather than taking another lump sum, you can send Interactive Investor a secure message online asking them to check what you requested – and they can help you to rectify it.

One further thought: you might have unintentionally triggered the

Money Purchase Annual Allowance ( MPAA) for pension contributions by taking income, bringing the amount you can put into your pension down to £10,000 a year.

This may be relevant to you as you are still earning through work, and may still be putting money into your pension. It is worth checking this with your provider, too.

If you are still contributing to your pension, then do remember that your contributions up to your annual allowance (or MPAA, if this has been triggered) still attract tax relief. This may be a way you could, in a roundabout way, receive back an amount that could equal what you have just unexpectedly paid in tax.