Pension savers tempted to move their funds around ahead of Rachel Reeves’ anticipated tax raid in the Autumn Budget have been warned they could land a hefty fine.
Analysts have warned one policy the Chancellor could change is to tighten tax-free allowances for pensions, such as by reducing the tax-free lump sum.
Current rules allow you to take out up to 25 percent of your pension pot as a tax-free lump sum, or up to £268,275.
But those thinking of moving their cash around could be hit with a 70% charge depending on where they put the funds.
If tax-free cash is ‘recycled’ by being put into another pension scheme, above certain limits, there could be several charges to pay.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, issued a warning to those thinking of taking funds out of their pension.
She said: “Ripping money out of a pension now potentially deprives it of future investment growth and could leave it subject to a whole host of taxes that it otherwise might not be, such as inheritance, capital gains, dividend and income tax.
“We could also see people try to reinvest surplus tax-free cash they’ve taken back into their SIPP and potentially fall foul of recycling rules that clobber them with a fine.”
If you breach the recycling rules, any unauthorised payments could be subject to HMRC charges of:
- A charge of 40 percent for the scheme member
- A surcharge of 15 percent for the scheme member
- A scheme sanction charge of 15 percent for the scheme provider.
You could be liable for the charge if you pre-planned to recycle the amount, and if you exceed these limits:
- The tax-free amount received over 12 months is above £7,500
- The amount you put into your pension is at least 30 percent of the tax-free cash, across the current tax year and the two tax years either side
- The amount you pay into your pension is larger than your normal contribution, which normally means more than 30 percent higher then usual.
Ms Morrissey also warned that people moving their pensions into savings could take a hit. She explained: “Even if the money is put in a bank account, there is a huge risk its purchasing power is eroded over time by falling interest rates.”
The expert said there needs to be clarity on the question of pension tax changes. She commented: “This ongoing speculation about potential changes to such a fundamental part of the system is hugely damaging.
“People need certainty to make long-term plans and they just don’t have that right now. The sooner changes such as raiding tax-free cash, can be ruled out, the more people can focus on the long term again.”
