Brits with a pension have been issued an important warning from HM Revenue and Customs (HMRC). They have been warned that withdrawing money from their retirement pot early could cost them.
According to HMRC, dipping into your pension early could be considered tax avoidance. They are urging pension savers to be fully aware of the rules before withdrawing any money. HMRC said in a post on X: “Thinking of dipping into your private pension pot early? It could be tax avoidance and could cost you a lot more than you think. Don’t get caught out. Check out our guidance below.”
Brits can currently withdraw up to 25% of their pension tax-free from the age of 55. There is a £268,275 limit with the remaining 75% taxed as income.
However, there are specific rules that need to be met before withdrawals are made. HMRC said: “Payments made outside the tax rules are classed as unauthorised and tax charges are payable.”
They add that “certain movements of pension funds” are deemed unauthorised payments. These include lump sums in excess of £30,000, continued payments of pension after the member’s death and “pension liberation” schemes, which are often advertised as loans or cash advances.
If you make a withdrawal from your pension that is an unauthorised payment, you will face one or two tax charges. This depends on how much of the fund you take out.
The unauthorised payments charge is 40% of the total value that you withdraw. You have to pay this on any unauthorised payment.
Meanwhile, the unauthorised payments surcharge is 15% of the total value that you took out. You have to pay this on any unauthorised payments that total 25% or more of your pension fund in a year.
This means that if your unauthorised payments total 25% or more of your pension in a single year, you will pay an overall charge at the rate of 55% There are two ways to pay the charge, including the mandating procedure and a Self Assessment tax return.
By signing a mandate, the scheme administrator can deduct the tax charge from the withdrawal on your behalf. However, if the charge is not taken off before you get the payment, you must complete your own return.
HMRC said these are the most common examples of payments classed as unauthorised:
- trivial lump sums in excess of £30,000
- continued payments of pension after the member’s death
- when a scheme realises it incorrectly calculated the amount of the member’s pension pot following a transfer of funds or purchase of an annuity and the balancing payment is made directly to the member
- most lump sum payments to cash-in or access pension funds before age 55 except when:
- the member retires due to ill health
- if before 6 April 2006 the member had the right under the pension scheme to take their pension before age 55