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Do not pay out 75 % income tax on your 25 % pension plan lump sum

After the introduction of the new pension regulations, we have been very disturbed to receive calls from a number of customers who have been confused by information provided to them by their current pension company. Many have been incorrectly led to believe that they have no option other than to pay tax on 75 % of any lump sum they take from their pension.

Lots of individuals have contacted their pension provider after the 6th April 2015 and requested to be paid 'their' 25 % lump sum - undoubtedly meaning the 25 % tax free lump sum allowance that exists within the majority of pension contracts. It therefore came as a surprise when they were told that while they could take 25 % of their pension fund as a lump sum, only the initial 25 % of the 25 % they obtain will be tax free, but they would need to pay tax on the 75 % of the 25 % pension lump sum they took. No surprise the customer is perplexed!!!

To be clear, the customer isn't really being presented with the solution to the question they are asking. The complication rises from the fact that the pension provider can only speak about what they and their specific product can offer and not what the pension rules allow the customer to do if they use an alternative product or provider. This indicates that while the answer given to the customer isn't incorrect, it isn't the full answer.

The following explains the situation simply - we trust !!

The crucial thing to realise is that personal pensions and drawdown are different products

All consumers with a personal pension have an entitlement to take 25 % of it as a tax free lump sum

The change to the pension rules makes it possible for customers to take some money directly from their personal pension fund - It was not formerly possible to do this. Any cash taken this way is liable to standard taxation rules meaning the first 25 % is tax free and the remaining 75 % liable to income tax

If the customer transferred their personal pension to a flexi access drawdown contract then following transfer they could take all of the 25 % tax free cash and leave the taxable part invested until they are older

So very simply, when these customers have talked about their requirements with their personal pension provider they have only been told the personal pension rules, they have not been told the flexi-access drawdown rules which allow them to do what they asked to do.

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While using your personal pension like a bank account may be a good idea for some, for many it could see them making needless tax payments to the Government. It is clear that the customers discussed in this short article only wanted their tax free cash, yet the sole option provided to them was one that would have seen a significant and unnecessary amount of tax paid.

Our personal view is that while pension providers cannot give customers advice, they should have procedures available that recognise customers who may be making a financial error and paying tax when they don't have to. The Regulator is presently examining annuity sales where it considers that some providers didn't do enough to assist customers make appropriate choices and have sustained a financial loss as a consequence. This new practice of making customers who clearly only want their tax free cash believe that they are obliged to pay tax on 75 % of any amount they take, has complaints, recompense and further customer scepticism in the pensions industry written all over it.

Call us and we will explain all of your flexi-access drawdown options to you with no obligation in simple, easy to understans language.

By Bob Cook
Published : 17th April 2015
Nothing in this article should be taken as personal advice and recommendation. UK tax rates and pension legislation are liable to change and concepts, rates, legislation and rules referred to may not be current at the time you read this article.


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