Savers tempted to dip into their pension are being warned to be careful before making a withdrawal. People rushing into such a decision could risk being slapped with an "unnecessary" tax bill.
The warning comes as more savers aged 55 and above are emptying their whole pension pot as the cost of living crisis takes hold. Basic rate 20 per cent taxpayers risk being nudged into a higher income tax bracket if they fail to plan with care.
The good news is that there is a way around this, the Express reports. But it takes some planning and careful monitoring.
For the last seven years, Britons have been able to withdraw from their pension since the age of 55, of which 25 per cent can be taken as tax-free cash. But any withdrawals beyond that will count towards your total earnings for that financial year and subject to income tax.
Over-55s, therefore, are being advised to proceed with caution as they could end up seeing 40 or 45 per cent of their pot going directly to HMRC. This could even be applied to people who are ordinarily basic rate 20 per cent taxpayers.
It's possible they could end up in a higher tax bracket after withdrawing a large one-off sum. There is a particular risk of this when people withdraw their entire pension pot in one go as opposed to taking it in instalments over several years.
Sean McCann, chartered financial planner at NFU Mutual, warned that fully withdrawing a pension can backfire. “Cashing in pension pots of more than £50,000 will push many into the 40 or 45 percent income tax bands and leave them with a large tax bill they weren’t expecting. It will also limit their funds for the future.”
There is a way round this “unnecessary" tax bill, he added. "It can be reduced by phasing withdrawals over a number of years instead of taking your entire pension pot in one go."
That involves taking a series of smaller sums each tax year, while monitoring your total annual income to avoid getting pushed into a higher tax bracket. Pension withdrawals are complicated so consider taking independent financial advice.
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