Thousands of people could be pushed into the higher rate tax bracket if they take advantage of the new pension freedoms from April 2015, research by MGM Advantage has found.
Next year, members of defined contribution pension schemes will be able to take their retirement savings as lump sums without having to buy an annuity.
But new research has found that 60,000 people due to retire after April 2015 could expose themselves to the 40% higher rate of tax and the self-assessment regime if they withdraw lump sums in the 2015/16 tax year.
For people who retire in 2015/16 at the average pre-retirement salary of £33,288, taking a pension lump sum of £20,000 would push them above the £42,285 earnings threshold for higher rate tax.
The research also revealed that many people are unaware of the potential implications of taking their whole pension pot as cash:
- 59% of over-55s said they didn’t fully understand the tax implications
- when told about the potential effects:
- 83% would be more likely to withdraw sums as needed instead of taking the whole pot at once
- 17% said the tax charge on a whole-of-pot withdrawal would not deter them.
Andrew Tully, pensions technical director at MGM Advantage, said the complexity of the changes could cause problems for people retiring from next year:
“The pension freedoms bring a new level of complexity and choice in how people access their pensions. One of my concerns, even with conservative estimates, is that many people could find themselves being dragged into the higher tax bracket and the self-assessment tax system for the first time. This could mean people either pay too little tax or too much tax, as well as the potential for hefty fines from HMRC for people who don’t complete their self-assessment on time.”