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Tax-free cash: Many people made pension withdrawals as a precautionary measure before the Budget
Before the budget, I took a 25 per cent tax-free lump sum out of my pension.
I was worried I would lose the opportunity to do it if the rules changed, but they didn’t and now I don’t know what to do with the money.
Can I return it and if not, what are my options?
This is Money’s Tanya Jefferies responds: Fears that the Chancellor would limit the amount of tax-free cash that pension savers can take out of their funds did not come true in the Budget.
But many people made withdrawals beforehand as a precaution, despite warnings that they could miss out on investment growth under the tax shelter of a pension in the future.
It’s worth noting that if you used a defined contribution pension for any amount above your 25 per cent tax-free lump sum, you’ll only be able to save £10,000 a year and still qualify for contribution tax relief from then on. .
We’ve asked a pensions expert to look at what people who received tax-free lump sums before the Budget can consider doing now.
Helen Morrissey, head of retirement research at Hargreaves Lansdown, explains five things to think about.
1. Try to cancel
If you recently submitted a request to your provider, you can see if you can reverse the instruction.
Your provider may operate some form of cooling off period, so if you are within it this could be an option for you.
However, there will be conditions attached – it will depend on your provider and your circumstances, including how and when they took your tax-free cash.
Helen Morrissey: Recycling rules were put in place to stop people taking their tax-free cash and reinvesting it into a pension to get an extra slice of tax relief.
2. Avoid the recycling trap
If you’re thinking about rolling the money into your pension, you’ll need to know the rules around this, otherwise you risk a tax charge.
Recycling rules were put in place to stop people taking their tax-free cash and reinvesting it into a pension such as a Self-Invested Personal Pension (Sipp) to get an extra slice of tax relief.
There are a number of criteria set out in the rules that must be met for it to be considered a violation: they are as follows.
– Tax-free cash is taken.
– Tax-exempt cash exceeded £7,500 (including any other tax-exempt cash taken in the last 12 months).
– Pension contributions are significantly higher than expected. This applies to personal, employer and third-party contributions.
– The value of the contribution increase is greater than 30 percent of the cash obtained tax-free. The recycling rules take into account contributions paid in the tax year in which the tax-free cash is taken, as well as the two tax years either side of it.
– The member planned the recycling; HMRC has the onus to prove that it was a conscious decision.
If you are deemed to have broken the rules, you could be hit with a 55 per cent tax charge on the value of your tax-free cash.
Therefore, any decision to roll over your pension should be carefully considered and it is worth seeking advice from a financial adviser to ensure you stay on the right side of the rules.
3. Help a family member
You don’t want to take tax-free cash and leave it in an easily accessible bank account where it earns a low interest rate and leaves you at risk of dipping into it.
Importantly, these rules cover contributions to your own pension and not someone else’s, so you may be able to use the money to top up your spouse or child’s pension, for example, and improve overall financial resilience. of his family.
You can roll over up to £2,880 per year into the self-invested personal pension (Sipp) of a non-working spouse or child and they will receive tax relief which will top it up to £3,600.
4. Invest or save
If you don’t go down any of the above routes, then it’s worth considering what other investment options are available to you.
You don’t want to take tax-free cash and then just leave it in an easily accessible bank account where it earns a low interest rate and leaves you at risk of having to dip into it frequently.
Investing it in a stocks and shares Isa means you can benefit from long-term investment growth and the income you earn can be earned tax-free.
If you decide to put some of your money in a savings account, you can use a savings platform to ensure you get competitive interest rates.
If you can keep some of your money for a period of time (say two years), you will also be able to guarantee the interest rate at a time when the Bank of England is likely to make cuts, so it is important to do so. your homework on what is available out there.
> How to choose the best (and cheapest) DIY investment Isa
> Check our Best Buy savings tables
5.Give gifts
Finally, starting in April 2027, pensions become part of your assets for inheritance tax purposes.
This is expected to change people’s behavior in terms of encouraging them to mitigate this tax by earning income from their pension rather than other assets.
We could also see an increase in donating money while they’re still alive rather than leaving it to someone after they die, and there could be renewed interest in annuities.
If you were considering giving gifts to a loved one, then this might be a consideration, but you’ll want to make sure you don’t give too much and run out of cash in the future.
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