New Pension Rules Affecting Over-55s
An oddity in the income tax system means HMRC incorrectly overcharges people who make the most of new rules to withdraw cash from pensions. In April 2015, new rules stated that over-55s can withdraw regular or provisional sums of cash from their pensions.
However, if a person makes a significant withdrawal in a single month, the HMRC assumes this to be a revised and continual income each month, and therefore, taxes the individual on an “emergency rate”.
As a result, thousands of senior Brits who plan to use new pension rules to pay off their debts may find themselves paying 70% tax on withdrawals, which they were expecting to be tax-free if they had continued saving for their retirement.
This rule was designed to prevent pensioners from abusing the system. Unfortunately, it means that those over-55s with modest pensions are now at risk of accidentally breaking the official saving limits. The changes were made discreetly in April this year, and the new rules now affect more people than ever.
Penalties Given To Those Breaking New Pension Rules
If people are caught “recycling” too much of their pension money, they may have to pay a 40% “punishment” tax on top of tax-free cash. This is in addition to similar penalties to those who try to illegally access their pension before they turn 55.
This is most likely to affect those who have been innocently taking advantage of the pension rule changes to pay off debts, such as mortgages and credit cards, while simultaneously continuing to work in order to contribute to their prospective pension scheme. The repayment of debts is one of the most obvious ways those people will be “caught out”. The system will misinterpret that the money, which they would have been putting towards debt repayments, will instead be put towards pension schemes.
Is The New Pension Rule A Sly Government Move?
While this seems like an obvious decision for people who have paid off debts and want to prepare for their retirement, such a procedure may be deemed “taking advantage of the tax system” by HMRC.
However, the government has not made this risk known, and most people over 50 don’t have access to professional financial advice leaving thousands with a potential 70% bill. Innocent hard-working people who assume they’re doing the right thing may be hit by tax levels which even the very wealthy wouldn’t need to pay.
While you can claim on the overpayments, the procedure to do so includes a longwinded tax return form. It also brings to attention for those who have made smaller withdrawals may have suffered a similar penalty without even knowing.