Money Box - Tax on lump sum withdrawals under new rules

BazzerPontefract

Just heard a piece on Money Box, which has confused me.


The questioner asked what would be the tax implications of taking a £30K sum from a pension pot.


The expert said: for tax purposes, the £30K drawdown would be considered as a request to drawdown £30K every month throughout the year, therefore the provider would assume an annual drawdown of £360K and tax on the initial drawdown under a temporary tax code and deduct tax proportionate to the annual value.


This seemed so daft to me, that I thought I'd better ask one of the experts on this site.


Any takers, please, to put me out of my misery.

DancingBadger

The questioner asked what would be the tax implications of taking a £30K sum from a pension pot.


The expert said: for tax purposes, the £30K drawdown would be considered as a request to drawdown £30K every month throughout the year, therefore the provider would assume an annual drawdown of £360K and tax on the initial drawdown under a temporary tax code and deduct tax proportionate to the annual value.

That's correct, but I think your question arises from concern about the 25% tax free lump sum, which will remain untouched. Am I right?

Thrugelmir

BazzerPontefract wrote: »

This seemed so daft to me,

Why?

That's the way PAYE works i.e. a monthly basis. If you were to receive a lump sum in your salary for any reason you would taxed accordingly.

dunroving

Thrugelmir wrote: »

Why?

That's the way PAYE works i.e. a monthly basis. If you were to receive a lump sum in your salary for any reason you would taxed accordingly.

I think it is daft, too. Just because that's how PAYE works doesn't mean it's not daft in this situation.

Hopefully with the new pension rules coming in there will be some way to declare that a withdrawal is a one-off payment rather than a monthly salary, to avoid the "computer says No" scenario.

A friend has a bond with Aegon and they said if she makes a withdrawal, they will not tax it at source but she will have to deal with HMRC via self-assessment. Seems that pensions need some sort of provision to work this way too.

srcandas

Thrugelmir wrote: »

Why?

That's the way PAYE works i.e. a monthly basis. If you were to receive a lump sum in your salary for any reason you would taxed accordingly.

Yes true but as this special event is often controlled by a special tax rate (in my case BR), is not related to a standard PAYE payroll, and will frequently be one off a PAYE approach could be seen as not very helpful.

I have always found that HMRC try to collect tax fairly and behave in a responsible manner. Hopefully they will address this issue in the future. For now I can imagine it will remain an issue short-term.

I'll be making enquiries with HL in this regard Monday and will get back one way or the other. If others could to I'd appreciate it :beer:

dunstonh

Hopefully with the new pension rules coming in there will be some way to declare that a withdrawal is a one-off payment rather than a monthly salary, to avoid the "computer says No" scenario.

I cant see why HMRC would change a system that has been in place for a very long time and works well.

A friend has a bond with Aegon and they said if she makes a withdrawal, they will not tax it at source but she will have to deal with HMRC via self-assessment. Seems that pensions need some sort of provision to work this way too.

Bonds have a different tax method. The method does not come under the same system. For example, you dont get a P60. Pensions work the same way as employment income.

The month one method has been used for a very long time and seems to work well. There is a form to speed up the refund process for those that cant wait.

srcandas

dunstonh wrote: »

I cant see why HMRC would change a system that has been in place for a very long time and works well.

But it hasn't worked well under current circumstances. Everything needs to adapt to circumstance.

dunstonh wrote: »

The month one method has been used for a very long time and seems to work well. There is a form to speed up the refund process for those that cant wait.

And that was my next question. Are you a mind reader

srcandas

Just spoken to HL.

The SIPP I have that is in drawdown has a tax code of BR. They say they will use this tax code and withhold 20% for HMRC. I asked what would happen if I took more than the higher rate tax allowance and they said they would still only take 20%.

On the SIPP not in drawdown they would tax it as month one or emergency as they have no tax code. (sorry I was interrupted with a family emergency at that point or would have drilled into that further ).

Hope that helps but of course just helpline info although I have always found HL spot on in the past :cool:

dunstonh

But it hasn't worked well under current circumstances. Everything needs to adapt to circumstance.

The alternative is that they dont tax in the same way, the person spends the money and then finds out 2-6 years later they owe HMRC and have to pay the amount plus penalties but no longer have the money to do it. Then the media write articles about HMRC chasing some poor penniless pensioner.

There is no perfect system. Using PAYE is at least consistent.

SailorSam

Op i don't want to hijack your thread but i was listening to Moneybox at lunchtime and there was another thing i thought i heard, they said it so briefly.
They were saying that just 'cos of the changes to the system you didn't have to withdraw your money (which i know). But if it came to the point when you were to claim Pension Credit if you aren't receiving a pension and it is still invested, the Dwp will calculate what that pension might be and adjust your Pension Credit to suit.

jamesd

SailorSam wrote: »

if it came to the point when you were to claim Pension Credit if you aren't receiving a pension and it is still invested, the Dwp will calculate what that pension might be and adjust your Pension Credit to suit.

Yes, using the annuity equivalent level of income.