Pension savers looking to shuffle their retirement funds before Rachel Reeves shakes up tax policy in the Budget risk being slapped with a hefty penalty. Experts have cautioned that one measure the Chancellor might tweak is pension tax-free allowances – including by slashing the tax-free lump sum you’re allowed to take out from your pension pot.
Right now, you can pocket up to 25% of your pension without paying tax on it, or up to £268,275. However, those looking to move around their pension savings to avoid paying more tax could incur a 70% charge.
If an individual ‘recycles’ their tax-free cash by putting into another pension scheme and goes over set thresholds, a string of charges could ensue. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, cautioned about the risks of taking cash out of your pensions.
She warned: “Ripping money out of a pension now potentially deprives it of future investment growth and could leave it subject to a whole host of taxes that it otherwise might not be, such as inheritance, capital gains, dividend and income tax. We could also see people try to reinvest surplus tax-free cash they’ve taken back into their SIPP and potentially fall foul of recycling rules that clobber them with a fine.”
Those breaching the rules could be subject to:
- A charge of 40 percent for the scheme member
- A surcharge of 15 percent for the scheme member
- A scheme sanction charge of 15 percent for the scheme provider
You could end up with a bill from HMRC if you pre-planned to recycle the amount, and if you exceed these limits:
- The tax-free amount received over 12 months is above £7,500
- The amount you put into your pension is at least 30 percent of the tax-free cash, across the current tax year and the two tax years either side
- The amount you pay into your pension is larger than your normal contribution, which normally means more than 30 percent higher then usual
Ms Morrissey had another word of warning for those thinking of moving over funds from their pension pots into everyday savings accounts. She explained: “Even if the money is put in a bank account, there is a huge risk its purchasing power is eroded over time by falling interest rates.”
(Image: Getty)
The expert said there needed to be clarity about changes to pension tax policy, adding: “This ongoing speculation about potential changes to such a fundamental part of the system is hugely damaging. People need certainty to make long-term plans and they just don’t have that right now.
“The sooner changes such as raiding tax-free cash, can be ruled out, the more people can focus on the long term again.”