Beware 70% pension tax charge


22-09-2015

Moneyology writes - Thousands of people aged over 55 who take money from their pension funds face possible 70% tax charges, says the Mail.

 

Beware 70% pension tax charge  

Thousands of people aged over 55 who take money from their pension funds face possible 70% tax charges, says the Mail. This is because if you take a tax-free cash sum of over £7,500 from a pension fund, and then add to your regular pension contributions, HMRC can claim that you are abusing the tax relief system and impose a 40% tax charge on the tax-free cash withdrawal plus 30% in other charges and penalties. The issue arises because many people are taking cash from old pension pots, typically worth less than £50,000, while remaining in their employer pension scheme to which they make contributions. It's open to HMRC to say that if the tax-free cash was used to, say, pay off debt, that was what enabled someone to pay more into their pension - and this is defined as abuse.

This is yet another example of why you really do need to take care - and advice - on pensions to avoid the tax traps.

Pension tax relief under threat

The government launched a review of pension tax relief in July, and is expected to announce a policy change, perhaps as early as November, says the Times. Most experts believe the tax relief system will be changed to reduce tax relief to a flat rate of about 30%, and suggest that higher rate taxpayers make hay while the sun shines.

Avoid a drawdown disaster

The Telegraph showed how someone entering pension drawdown in 2000 could have lost half their fund within three years. The disaster was caused by taking too much out of the fund each year, and not setting aside a cash reserve at the start that could be used to draw on if the market - as it did – fell severely. Simple steps can be taken to reduce the risk and you would be unwise to enter drawdown without getting advice.

Pensioner wins cash-in battle

A pensioner won his battle against an insurance company to cash in his pension pot without having to pay for advice he didn't need, reports the Mail. Originally, Phoenix Life insisted he get advice before cashing in a £13,000 fund, but since he had other substantial pension funds he had good reasons for getting rid of this one. Eventually Phoenix caved in and let him go ahead. Insurance companies interpret the rules in their own way, sometimes wrongly, and as advisers we often have to persist to get the right answer for clients.

 

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