Pensioners looking to take advantage of the new pension freedom reforms coming into effect next April will find themselves having to complete the complicated self-assessment forms,
Experts in the field are concerned that many newly retired savers will not seek independent advice before deciding what to do with their pension pots, with many choosing to withdraw large amounts of money without realising they will be subjected to tax if their income exceeds £10,000 per annum.
As things stand, once a saver takes money out of their pension they would be liable to income tax (at a level depending on how much money they had withdrawn and other additional forms of income they may be receiving), and the money could not be returned to the pension scheme once withdrawn in an effort to reduce the tax bill.
There are approximately ten million people in the UK who have to fill out self-assessment forms each year – most of which are currently self-employed or people on higher rate tax.
This figure is set to rise if many pensioners choose to tax out lump sums from their pension pots.
Many pensioners will be receiving their retirement income from two or three different source – mainly the state pension and their personal or workplace pension and then any other investments or earnings, all with separate tax codes.
The self-assessment forms are acknowledges as being complicated and long-winded with many filling in their forms incorrectly each year.
Pensioners who don’t complete their forms correctly could find themselves landed with a large tax bill, or have any money owed taken from their personal allowance the following year (or years) to make up the difference. This could be troublesome for those who don’t have a large pension pot and are on a tight budget.
In addition, those who drawdown money from their pension pots which causes them to exceed their personal allowance could suddenly find themselves on a higher tax code.
Those who choose to keep their pension invested in the scheme but withdraw differing amount each year are certain to have to complete a self-assessment form and having to pay the tax owed in one lump sum rather than drawn out across the entire year.
As always, experts advise that anyone choosing to withdraw money from their pension pot seeks guidance from an independent advisor who will ensure they understand the tax implications of their decisions.