HMRC has published its latest update on flexible payments from pensions. This confirms 585,000 withdrawals were made by 258,000 people in quarter 3 2018, with total withdrawals in this quarter nearly £2 billion. In the three and a half years of pension freedoms, nearly 5 million withdrawals have been made by over 1.3 million people, totalling £21.6 billion (April 2015 – Oct 2018).
Cash is king as the rush to withdraw money from pensions following the introduction of the freedoms shows no signs of abating. Quite the opposite in fact, as the latest official figures show Treasury expects to receive an additional £400m1 in tax receipts from flexible pension withdrawals this year.
Typically smaller pensions are being fully withdrawn, while people with larger pensions are making multiple withdrawals in a tax year, suggesting they are treating their pension more like a bank account. These pensions are also being accessed for the first time before state pension age.
This combination of taking multiple withdrawals in a tax year at earlier ages, when people are still likely to be earning income from work, means many people are likely to be paying more tax than if they took withdrawals more gradually.
The Treasury is enjoying a tax bonanza, as predictions that paying income tax will be a natural brake on withdrawals hasn’t stopped people simply taking the money.
The latest HMRC pension scheme newsletter (published 31st October) has also confirmed around £38m2 has been refunded in overpaid tax following the application of emergency tax rules on pension withdrawals in the last quarter (1st July – 30th September), as many people continue to overpay at the point of withdrawal.
Free tools are available to help people calculate the potential tax charge on pension withdrawals.
Andrew Tully, Pensions Technical Director, Canada Life
- Source: part 4.44. ‘Higher tax paid on pension flexibility withdrawals. We have revised up 2018-19 yield by £0.4 billion, as earlier cohorts are drawing down their pensions for longer’
- HMRC Pension schemes newsletter 104 for October 2018