A £1 pension trick could stop you from losing thousands in emergency tax when withdrawing from your pension, according to personal finance experts
State pensioners could potentially save themselves a heap of tax trouble – and literally thousands – by spending just £1, with personal finance experts advocating a nifty £1 pension manoeuvre to prevent hefty emergency tax payments upon withdrawing from their pensions.
People eligible for the state pension, who are required to be at least 66 years old and born before 1959, find themselves susceptible to overpaying tax on withdrawing lump sums. Official figures from HMRC show that during January, February and March, retirees managed to reclaim an eye-watering £44 million in excess tax payments, averaging around £3,000 each.
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By strategically drawing out a minimal sum, sometimes just a quid, HMRC is nudged into providing an up-to-date tax code, thus securing the correct rate for those affected, and saving them from being charged too much tax, reports Birmingham Live.
The Money Saving Expert, Martin Lewis weighed in: “The big thing to understand when it comes to taking money out of your pension when you’ve got a pot of money built up, a lot of what’s worth thinking about is tax.”
He added: “You generally get 25 per cent of the money in your pension tax free, and the rest is taxed. But what counts and when it’s taxed is when it gets complicated.”
Lewis explained further: “But if you do what’s called a draw-down or annuity then you can just take the jam, you can take 25 percent of your pension totally tax free and you’re paid the rest via the draw-down or annuity later when you take it.
“This allows you to control when you pay the tax on your pension pot. If later on in life you become a non-taxpayer, you take the rest out when you’re a non-taxpayer, you get a 25 per cent lump sum now, and then when you take the rest of the money out even though it’s taxable, because you’re a non-taxpayer, it would be better for you.”
Tom Selby, director of public policy at AJ Bell, commented: “We have only just blown out the candles on the cake celebrating 10 years of pensions freedoms.
“It is simply unacceptable that, after all this time, the Labour Party Government has still not managed to adapt the tax system to cope with the fact Britons are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.”