A pension saver has asked HMRC how the tax rules for taking a lump sum from a pension works and if this could result in a large tax bill.
They contacted the tax authority over X to ask: “If a 25 percent lump sum (tax free) is drawn down from a personal pension when eligible, does this contribute to your annual salary?
“For instance, if £25,000 is drawn down from private pension, does earning another £25,000 put you into the higher tax bracket.”
A representative said in reply: “No, the tax-free element is not included when calculating your taxable annual income.”
Under the current rules, a person can usually take up to 25 percent of their pension pot as a lump sum up to a maximum of 25 percent of the pensions lifetime allowance (LTA), of £1,073,100.
With the start of the new tax year on April 6, the pensions lifetime allowance is being scrapped, with income and lump sums from pensions valued above the LTA to instead be subject to income tax at the beneficiary’s marginal rate.
Income derived from a pension is subject to income tax, with 20 percent tax to pay on income above the annual personal allowance of £12,571.
Income above £50,271 is subject to a higher 40 percent tax rate while earnings above £125,140 are subject to a 45 percent additional rate.
The Spring Statement set out several fresh policies for pension funds in efforts to deliver better payouts.
New powers were brought in for The Pensions Regulator and the Financial Conduct Authority to define the value of pensions according to their returns rather than costs.
Becky O’Connor, director of Public Affairs of PensionBee, said: “A lot of what the Chancellor announced here is work that is already in motion, with the exception of the public disclosure of asset allocations, to make it clear how much of pension savers’ money is invested in the UK.
“The focus on value for money rather than the costs of pension investments is welcome. It’s also important that pension savers understand what counts as value for money in the investment world.
“Rules to disclose the proportion of funds invested in the UK versus elsewhere, as well as performance information, are a good idea.
“More transparency in general over where pension savers’ money is invested is welcome. Savers would also benefit from having a better understanding of how and where their retirement funds are invested.
“However the Chancellor needs to beware the unintended consequences of disclosing past performance alongside information on how much a pension fund invests in the UK.
“It may unfortunately show poorer performance of domestic investments – not exactly the incentive to invest in the UK the Government might hope to provide.”
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