Pension winding up - advise needed on tax

Lchscot

Friday I received a letter from an old pension scheme saying it was winding up. They have offered me a cash withdrawal to shut the account as it’s under £18000. I am 49 and could use the cash.

This will for the tax year push me into the next tax bracket which is not ideal. It appears to be taxed at 20% before being paid. Questions! Is there any tax penalty I am not aware of other than what will be my nominal rate for the year? Will the HMRC base following years tax calculations including this extra income (even though it’s a one off payment) and how hard will it be to correct my tax code? Thanks!!

molerat

No, it won't affect next year's tax coding as you will receive a P45 and HMRC will see it as an ended income stream but there may be some additional tax due. If so HMRC will issue a P800 mid 2026-27 and collect that tax by code change in 27-28. You could of course mitigate any 40% tax due by paying in to a pension.

DRS1

Is that the only option they have offered you? Or could you take a transfer to another pension scheme? Surely it would be better to keep the money in a pension if you can?