People urged not to make rash decisions about pension choices

(2 minutes to read)

LITRG: ‘We urge people not to rush into making decisions about pension withdrawals without fully exploring the tax and other consequences of their actions, including impacts on welfare benefit’.

With the cost of living crisis worsening, tax experts are warning people not to make hasty decisions regarding their pension pots.

The LITRG (Low Incomes Tax Reform Group) are concerned that rash decisions to take money out of pensions could result in costly mistakes – their warning comes after the recent launch of a government call for evidence on ‘Helping savers understand their pension choices’.

The LITRG says that people often do not understand enough about the tax consequences of their decisions.

Kelly Sizer, Senior Technical Manager for LITRG, explains, “We know of people who have received very large tax bills, often unexpectedly, since pension flexibility began. For example, in households where there is a child benefit claim in place, tax charges can include a high income child benefit charge when a pension withdrawal pushes the person’s adjusted net income over £50,000. This also means the taxpayer must notify HMRC they are liable for the tax and fill in a Self Assessment tax return.

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Sizer added, “People should plan ahead where possible. They might pay less tax on money from pensions if it is taken in stages, spread out over a number of tax years, or withdrawn after they have stopped work. For those on lower incomes, tax credits and benefits impacts also need consideration – for example, the taxable element of pensions is also taken into account as income for tax credits.

“Think about the future. If you are looking to take money out of a pension to get you through a spell of financial difficulty, you might wish to pay into a pension again in future if the squeeze on your income eases. However, once you have taken pension benefits under the pension flexibility rules, future tax relief is restricted such that you are limited to paying in £4,000 gross a year,7 which is a possible tax trap to beware of.

To find out more about contracting please contact Jaime on 01442 795 100 or email jaime.thorpe@dolanaccountancy.com.

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