A Freedom of Information (FoI) request has revealed that 980,000 people aged 55 or overtook a flexible payment for the first time from their pension pots between the freedom introduction in April 2015 and the end of September 2018.
This equates to around 70,000 people per quarter, so the total to date may exceed 1 million. The withdrawals total more than £22 billion since the pension freedoms came in almost four years ago.
However, this group may face unexpected tax charges due to tougher pension contribution restrictions. Tax relief is normally available on pension contributions of up to £40,000 a year, but once a pension saver makes a flexible withdrawal, contributions are considered part of the money purchase annual allowance of £4,000 per year.
Not every withdrawal is classed as a flexible payment though. For example, if an individual takes a 25 per cent tax-free lump sum from a money purchase plan, this is not a flexible payment.
According to the information received through the FoI, more than a million people are now subject to stricter rules that dramatically reduce the tax efficiency of pensions and increase the potential for inadvertently triggering tax charges.
As one commentator remarked, the tax rules around withdrawals from pension plans are quite complicated, so anyone thinking of taking a flexible payment believing that the withdrawal is going to be tax-free would be advised to take professional advice.
To find out more about how Kirk Newsholme Financial Planning can help, please contact Richard Leonard at Richard.Leonard@knfp.co.uk or by calling 0113 204 4215.