The majority of people accessing their pensions for the first time might well end up overpaying tax, particularly if they withdraw large sums of cash.
That’s the warning from Prudential head of business development Vince Smith-Hughes.
People rushing to draw large chunks of money from their pension pots from April 6 will likely fall into the tax office’s emergency tax code because providers will not yet have obtained their normal income tax codes, Smith-Hughes has suggested.
Under the new pension rules, people will be able to withdraw a quarter of their pension pots tax-free – and the remaining three-quarters taxed as if it were income.
Emergency tax is a temporary code that assumes the lump sum taken is a regular monthly income, hence it pushes people into higher tax brackets when calculating their presumed annual income.
Consumers can claim the tax back from HM Revenue & Customs (HMRC) immediately after the charge, but Smith-Hughes warned that delays are a big possibility as the tax office is expected to face unprecedented demand.
The ‘man from the Pru’ suggested a way around the issue would be to withdraw smaller amounts initially until the right tax code comes through to the provider.
Smith-Hughes added: “For the majority of people when they draw money out for the first time they will be put on an emergency tax code because there is no P45 or P60.
“Hundreds of people cashing in their pension pots will be paying an awful lot of tax and then trying to get the tax back from HMRC.
“This is going to hit us very quickly. It is likely to be better [for people] to take smaller sums more often.”
The issue will not affect people who purchase a drawdown product.as
HMRC issued a newsletter giving guidance on the issue in February. It can be read here: