People who are releasing money from their pension are using a “£1 trick” to reduce the amount of tax they have to pay. This technique helps to ensure that they are not hit with the emergency tax rate on their withdrawals. Currently, a “quirk” in the tax system means that if you release a lump sum from your retirement savings, HMRC assumes you are then going to release the same amount every month in the future.
The Telegraph explains –
“This “emergency tax” provision means pensioners only receive a twelfth of their “personal allowance” – the amount you can earn each year without paying income tax. The bizarre rules means Telegraph Money readers have in some cases paid thousands of pounds too much in tax…Assuming no other income, a £10,000 withdrawal should be tax free because it falls under the personal allowance (£11,500 in 2017-18). But if HMRC applies emergency tax the bill would be over £3,000…Paul Beardmore, 70, was shocked to discover he would have to pay hundreds of pounds in tax even though he only wanted to take two £1,500 lump sums from his self-invested personal pension (Sipp)…He said: “I’ve deferred taking my pension but about a year ago started looking in the mechanics of taking money out. I assumed you’d be taxed but when I saw I was going to be taxed at this enormous rate it was quite a shock… It seems funny to me that someone with a small pension pot would be assumed to be taking out the same amount each month. My provider also charges you each time you make a withdrawal, so I want to make as few withdrawals as possible.”