Pension warning: How to avoid ‘danger’ which could leave you facing higher tax bill

Expert reveals tips on how to save for retirement

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As the end of the tax year approaches, there are plenty of pitfalls for Britons to watch out for. People may find that if they do not plan their pension drawdowns effectively, they could be hit with a nasty surprise.

Interactive investor, the Self-Invested Personal Pension (SIPP) platform, is warning those pension holders taking taxable income from their pension to leave plenty of time for their final payment of the tax year to enter their bank accounts.

If they fail to do so, they could face an unnecessary extra tax bill.

More than 200,000 pension holders are expected to move money into drawdown for the first time this year.

Some 106,619 people entered income drawdown or took an Uncrystallised Fund Pension Lump Sum (UFPLS) for the first time between October 2020 and March 2021, according to FCA figures.

Leaving the last drawdown payment of the tax year too late can result in the payment not entering someone’s account until after April 5.

This could potentially leave them with a higher tax bill to pay in the following year.

For example, someone drawing down their final payment before April 5 who receives a total income of £12,000 would not pay any tax on this income if it all came out in one tax year.

This is because it would be within the personal income tax allowance.

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However, if their final payment was delayed and came out of their bank account the following week, they would lose some of their tax-free allowance this tax year.

The result of this would be them paying more tax in 2022/23.

While all drawdown customers could have this problem, some people may be more at risk.

In particular, those drawing from their pension pot for the first time are most likely to be caught unawares and leave it too late.

Becky O’Connor, Head of Pensions and Savings, interactive investor, warned Britons of the potential consequences of waiting too long to make their final drawdown of the year.

She said: “A few days delay in initiating the final drawdown payment of the tax year can make a big difference.

“The danger is that someone could lose out on some of their personal tax allowance and then face a higher tax bill the following year.

“Or, if they are approaching the higher rate tax threshold, they could miss out on withdrawals being taxed at the basic rate this year and end up paying higher rate tax next year.”

Ms O’Connor urged people to ensure they have planned in advance so as not to fall foul of the deadline.

She said: “To avoid this and to keep pension payments and any income tax owed as aligned as possible, it’s best to try and time the final withdrawal payment of the tax year with plenty of time to spare before April 5.

“That way, you can avoid the risk of losing out on tax allowances and lower tax rates now, then facing a higher bill next year.

“When managing pension withdrawals for tax purposes, timing can be everything. Don’t leave it too late.”

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