PENSION REFORM 2014/15
Synopsis: Which? On-Line Tax Calculator: Potentially misleading?
Before we consider the research by Which? It is worth pointing out that they have included an on-line calculator, to quote Which?:
‘Which? has launched a free online calculator to help people work out the tax they’ll pay if they cash in their entire pension pot or take a lump sum. Our previous research found that if someone really did use their pension pot to buy a Lamborghini, they could end up paying enough tax to buy a Porsche.’
The calculator ask the user to input the amount to be taken as a UFPLS and also details of their other income. The main issue is that in many cases it will understate the tax deducted and this might cause problems for advisers.
If the inputs of a UFPLS of £30,000 is input with other income in the year of £10,000 the calculator sets out the answer as follows:
‘What you get, and what tax you pay
If you cash in £30,000, you will pay £4,380 in tax.
This means you’ll receive £25,620 after tax, which includes a tax-free lump sum of £7,500.
Whether you take your whole pot or just part of it, 25% of the withdrawal is tax free. The rest is taxed as income. Making a series of smaller withdrawals over several years can mean less tax than if you take your whole pot at once.’
However, that might be the tax liability at the end of the tax year, but in the meantime the pension scheme administrator, following the HMRC guidance set out in Pension newsletters 66 though to 68, will often apply the PAYE Code on a ‘month 1 basis’ (see our Bulletins dated 12 January 2015, dated 24 February 2015 and dated 7 April 2015) and as such will deduct more tax than has been intimated by Which?
Under the Emergency tax Code of 1060L M1, which will be used in the majority of UFPLS payments the tax deducted will be as follows:
So, the £8,572 tax deduction by the scheme administrator is almost double that calculated by Which? This will doubtless cause many unsuspecting individuals to make complaints against their scheme administrator for deducting too much tax and claim that ‘Which? must be rights and the wrong tax must have been deducted.’
Which need either to alter their calculation or clearly explain the calculation is the ‘yearend‘ liability and initially more tax is likely to be deducted by the pension scheme administrator due to the PAYE requirements. We are currently in contact with Which? over this matter.
Turning now to the Which? survey itself, a summary of their findings are:
The majority of people approaching retirement age are confused about how tax works in retirement, according to new Which?
Which? surveyed 1,204 adults aged 55 or over and found that 60% of people who are not retired do not know the pension reforms allow you to take up to a quarter of your pot tax-free.
One in seven (14%) wrongly think their entire pension pot is tax-free while two thirds (67%) admit they have limited or no understanding of tax issues in retirement.
Of those who are retired, only a quarter (25%) think tax has become simpler since retirement.
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