drawdown tax

pauljohnwilson

My Pension draw down is being taxed even though I have not and will not exceed the personal allowance level. Surely this is unfair and not in keeping with the idea of pension drawdown.
I am 62 years old retiree, have a SIPP drawdown account with HL worth £120K and was looking to use some of this to bridge my pension until I am 65, when other pensions come into play giving a satisfactory reliable income. I planned to withdraw ~£7K each year up to this point. Other sources of income amount to ~£3K, so I calculated that I would not have to pay income tax on my withdrawal. In May 2016 I withdrew £7000 in line with my thinking. HL took their commission and paid tax at basic rate on this amount (£1820).
On querying this with HL, they replied that this was in line with HMRC requirements. I checked my position on my HMRC account and it is exactly in line with expectation, stating that my estimated PAYE income tax would be zero for the year 2016 to 2017. All other details on the account also looked correct. So, full details of my income are on the site.
I contacted HMRC in July 2016 and received a written response from them stating my monthly allowance is £916.66 and anything above that amount will be taxed. While I understand the response and know I can claim it back next tax year, it is completely robotic and surely not in keeping with the idea of pension drawdown.
Can you confirm this behaviour is correct please? I feel very aggrieved that HMRC have my money which I had planned on using during this tax year.

Regards,

Paul Wilson

molerat

Unless you ask HMRC to allocate part of your tax allowance to HL then it will continue to be taxed.

Can that be done ? I am sure someone in the know will be along to confirm.

Triumph13

Your provider has to tax you as if they were going to pay you that amount every month. If you then contact HMRC and tell them that you won't have any other income they will send you the tax refund without having to wait for the end of the year.

zagfles

Pensions are paid like employment income with a tax code etc. You should be able to get the tax back this year, contact HMRC. Was the withdrawal a UFPLS?

xylophone

What is the tax code that is being used by HL for 2016-17?

Linton

Your first ever drawdown from a pension is taxed at an emergency code because HMRC only become aware that you have a new source of income when they are told about it by the pension company after the initial payment.

Subsequent payments in this and following years will then be taxed correctly. If you have multiple drawdowns in the first tax year PAYE should sort everything out correctly. But if you only take one in a year this isnt possible. By default any refund is sorted out at the end of the tax year but you can request one earlier by use of the appropriate form - see here.

Note that exactly the same thing will happen with employment earnings - it's an intrinsic feature of the PAYE system.

NordicNoir

pauljohnwilson wrote: »

In May 2016 I withdrew £7000 in line with my thinking. HL took their commission and paid tax at basic rate on this amount....

Sorry to change the subject but you have me confused! What commission does HL take when you make a drawdown payment? I always thought it was free?

NordicNoir

Even if HL had the correct tax code for your first payment, you would still have paid tax on the payment.

You will have the same problem in the next tax year if you take a lump sum early on in the tax year. Next year your tax allowance will be £11,500, so if you took a £7,000 lump sum in May you would pay tax again. If you took the lump sum in November, you would pay no tax;

Tax allowance at Nov 17 = 11,500 \ 12 x 8 = 7,667

Depending on how important the timing of the payments and the HMRC hassle factor is to you, you could just take an amount equal to the monthly tax allowance (£958) until you have taken the amount you want for the tax year.

Note: this does assume your full tax code is given to HL, if not, you will need to calculate the exact figures.

dunstonh

MichelleUK wrote: »

Sorry to change the subject but you have me confused! What commission does HL take when you make a drawdown payment? I always thought it was free?

There is no commission but it is not free. They have charges. Commission is banned except on in-house/own brand funds.

Surely this is unfair and not in keeping with the idea of pension drawdown.

You will end up paying the right tax. However, you are using a method that is not common and there is little scope for PAYE to caterfor ad-hoc lump sums any other way.

On querying this with HL, they replied that this was in line with HMRC requirements. I checked my position on my HMRC account and it is exactly in line with expectation, stating that my estimated PAYE income tax would be zero for the year 2016 to 2017. All other details on the account also looked correct. So, full details of my income are on the site.

PAYE assumes you are taking £7k a month as mentioned.

While I understand the response and know I can claim it back next tax year, it is completely robotic and surely not in keeping with the idea of pension drawdown.

Pension drawdown has been around for over a decade. It has always been this way. Without a fundamental rewrite of how PAYE works, it is likely to stay this way.

At some point they may decide to look at it and see if its worth spending £x million to change the system for the minority of people that it impacts.

I feel very aggrieved that HMRC have my money which I had planned on using during this tax year.

You get it back about 4 weeks after you notify them using the appropriate P form.

zagfles

dunstonh wrote: »

There is no commission but it is not free. They have charges. Commission is banned except on in-house/own brand funds.

They don't have charges for drawdown. They have charges for stuff like holding funds, but if held as cash it's free.

NordicNoir

dunstonh wrote: »

There is no commission but it is not free. They have charges. Commission is banned except on in-house/own brand funds.

But are they charges specifically on drawdown payments? I am aware of the 0.45% fee but I understood that HL do not make any charges to go into drawdown and take payments (other than for a GAD calculation or a CHAPS payment). You have me intrigued now!