Are you one of the estimated 5 million people who may have the opportunity to make your own decision about your retirement savings from Monday, when the new pension freedoms come into effect? Reader Lee Slade is one. But when he contacted his pension provider, Aviva, to set things in motion, he got a shock: he was told he would be charged emergency tax.
"Aviva told me that this was because of HMRC guidelines. However, after speaking with HMRC, I spoke again with Aviva and offered to provide my tax code as advised by HMRC to reduce my tax burden," Lee says. "It was at this point I was advised that this was a business decision and my tax burden would remain the same."
That conversation angered Lee. He had decided to cash in his pension to help get himself on the housing ladder, but says the extra tax burden will prohibit him from doing so. "This decision by Aviva is morally wrong," he says. "Aviva seems to have made a business decision to tax all pension withdrawals from 6 April on a month-one basis. The implication of this is that everyone withdrawing their pension fund from Aviva will be taxed at emergency rates.
"The bottom line is: it is my money, the law allows me to withdraw it, yet Aviva seems to be imposing a punitive penalty on those of us wishing to withdraw our pension pot and thus dissuading us from doing so."
I put his points to Aviva. A spokesperson for the insurance giant said: "Aviva is following the rules set by HMRC PAYE regulations. This is an HMRC requirement and not a decision we have made individually."
Apparently, this was set out in HMRC Newsletters issued in December 2014 and February 2015. "These rules establish that where a customer does not have a valid P45, an emergency tax code is required. Where they do have a P45, Aviva will update our systems to use the P45 tax code. We are required to use only the tax codes supplied by HMRC. It is not permitted to use tax codes from other sources or any other tax information supplied by a customer."
The company pointed out that Lee Slade and other customers affected can reclaim any difference in tax using form P50, P53, or through self-assessment at tax year end. "If they don't do self-assessment, HMRC says it will automatically calculate the right amount of tax and issue a refund, if applicable. Any changes to make the process simpler for consumers would be welcome," Aviva said.
Having spoken to other major pension firms, it seems they're all working to the same rules. One senior pensions official told me: "We have to make this charge to anyone who draws pension cash from us for the first time. But it is only likely to hit what we call 'front-loaders', those who want to take all their pension cash at once."
Those who choose to spread withdrawals over a few months are unlikely to be hit with the same tax bill, I was told.
That opinion was confirmed by Adrian Walker, pension expert at Old Mutual Wealth. "Individuals taking a one-off pension income withdrawal from April will be placed on an emergency tax code – unless they have a p45 – and may end up with an unexpected tax bill as a result," he says. "But one way of avoiding emergency taxation issues is to withdraw money using small pots payments."
I thought the new pension rules were complicated, but it turns out they're even more confusing than I thought. It should be a lesson to anyone – aged 55 or over – who's planning to take advantage of the new freedoms to think very carefully about their moves to avoid making an expensive error.
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