Money Box - Tax on lump sum withdrawals under new rules

Linton

mgdavid wrote: »

I find this utterly bemusing if not downright wrong. If you manage a SIPP online it is part of the request process to define if it's a one-off or repeat (periodic) DD.

In my experience its neither wrong nor bemusing unfortunately. I put in a one-off request and was charged tax beyond the straight 20% expected. Its not the numeric value of the tax code, but rather tax is levied by default on a "month 1" basis which has the effect the OP described even at the end of the tax year. Whether its a one-off or not doesnt get communicated to HMRC who specifiy exactly how the tax should be taken - the SIPP provider has no choice. I have talked to HMRC who reset the tax code to BR which I think should result in a 20% deduction. However this would only have an effect if I was taking another taxed payment this tax year, which I wont be. So I am probably going to have to wait a few months before I can get a refund of several £K out of HMRC, Hopefully next tax year the BR tax code will still be in force and excessive tax wont be taken.

xylophone

Thanks,
I've got 2 small pension pots both between £9k and £10k, and i shall be able to claim Pension Credit from June 2016. Until i heard Moneybox today i was going to leave 'the savings' were it is incase it's needed in the future some time.
Still plenty of time but must look into this.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/417473/pension-flexibilities-dwp-benefits.pdf

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dunroving

Linton wrote: »

In my experience its neither wrong nor bemusing unfortunately. I put in a one-off request and was charged tax beyond the straight 20% expected. Its not the numeric value of the tax code, but rather tax is levied by default on a "month 1" basis which has the effect the OP described even at the end of the tax year. Whether its a one-off or not doesnt get communicated to HMRC who specifiy exactly how the tax should be taken - the SIPP provider has no choice. I have talked to HMRC who reset the tax code to BR which I think should result in a 20% deduction. However this would only have an effect if I was taking another taxed payment this tax year, which I wont be. So I am probably going to have to wait a few months before I can get a refund of several £K out of HMRC, Hopefully next tax year the BR tax code will still be in force and excessive tax wont be taken.

May be a dumb question, but would this happen regardless of whether this was the first month in the tax year or the last month in a tax year where you had no, or minimal other income and no other withdrawals?

SailorSam

Thanks Xylophone, very informative that page.

jem16

dunroving wrote: »

May be a dumb question, but would this happen regardless of whether this was the first month in the tax year or the last month in a tax year where you had no, or minimal other income and no other withdrawals?

If you were on a normal cumulative tax code, then if it was the last month of the tax year your tax would be correct.

If it was the first month of the tax year, it would take too much.

However on a Month1 tax code it would be wrong regardless.

Linton

dunroving wrote: »

May be a dumb question, but would this happen regardless of whether this was the first month in the tax year or the last month in a tax year where you had no, or minimal other income and no other withdrawals?

Yes. On a month 1 basis the assumption is that this month is the first of the year, you get the same income each month for the 12 month year giving you a total tax bill, which is then divided by 12 and charged each month.

jamesd

jem16 wrote: »

How will having a tax code help James?

If the lump sum is paid early in the tax year, it will still end up with more tax being taken.

Not if HMRC send an NT tax code, maybe not if they send a BR tax code and maybe not if they use a large number L tax code. The employer may be required to use month one basis if they have no tax code but HMRC can do something more sensible to collect the correct amount of tax.

Thrugelmir

mgdavid wrote: »

I find this utterly bemusing if not downright wrong. If you manage a SIPP online it is part of the request process to define if it's a one-off or repeat (periodic) DD.

An individual could make say 3 one-off draw downs within the same tax year. There so many variables. There isn't a perfect solution.

Thrugelmir

jamesd wrote: »

Not if HMRC send an NT tax code,

Then there's an inherent danger that the person withdrawing money has no idea as to the potential tax implications. Something which is very apparent just having listened to the Moneybox programme. One suspects that pension freedom has been blown out of proportion with the media coverage. With the focus being on the wrong aspects. The average fund holder is most likely still going to prefer the security of a guaranteed income for themselves (and their partner). Once the dust settles. Small pots will get cashed in. Those with sizable pots (£500k +) will continue to use drawdown.

dunstonh

With normal retirement, people can provide the pension provider with their P45. That helps speed up the tax code. Although that wont help with people doing ad-hoc withdrawals.