How To Avoid The Worst Sins Of Drawing Pension Cash

Thousands of retirement savers are repeatedly making one of five financial mistakes when they take cash from their pensions.

The warning comes after HM Revenue and Customs (HMRC) revealed that the tax take from the over 55s cashing in their pensions was triple the expected amount.

HMRC has collected £2.6 billion against a forecast of £920 billion.

The tax forecast until April 2019 has been revised up from £3 billion to £5.1 billion.

Research by fund manager Fidelity argues that the tax grab results from five reasons:

Taking more cash than needed and paying more tax than necessary

Richard Parkin, Head of Pension Policy for Fidelity, points out that any money taken from a pension is tax treated as income in that year – which means adding the money to other income could mean paying too much tax or paying at a higher rate.

“It’s better to spread the withdrawals across two or more tax years to keep tax bills down,” he said.

Banking tax-free cash

A cardinal financial sin. Taking money out of pension to languish in the bank is foolish, argues Parkin.

Doing so triggers lots of tax issues – tax on interest paid, moving the money which is exempt from inheritance tax in a pension fund to a bank account which is not and adding to savings that might impact on claims for state benefits.

Taking tax-free cash in one go

You can take your money in lots of bites, says Parkin. Doing so leaves more invested that increases the fund and the amount of tax free cash to take when the money is needed in the future.

Taking tax free cash if you don’t pay tax

Speak to a professional about how to draw your cash under pension freedoms. If you have a tax free personal allowance and only take tax-free cash, you are not making the most of your income tax reliefs and paying more tax than you should.

Check if you have ‘protected tax-free cash’

Some pensions started before 2006 have special rules that can increase the available amount of tax-free cash. This can be a complicated topic and is best discussed with a professional adviser.

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