Tax and taking a pension lump sum

Couple in a convertable car driving on a road into the countryside pension lump sum

Tax

MoneyPlus Features Team

13th October 2015 at 3:59pm

The pension freedoms – which became effective from 6 April this year – have given vast new choices to savers as to how and when they access their money. And pension savers aged 55 or over now have the option to withdraw a pension lump sum.

No longer is there the compulsion to buy an annuity paying an income for life, although this remains an option.

Read the paperwork

But pension savers need to remember with this fresh control also comes increased responsibility.

The ability to take your pension pot as a lump sum has been with us now for a few months and many people have  taken advantage of this opportunity to get some much needed cash. But what they may not have done is read the letter that came with the payment.

Tell your providers

By taking more than just your tax free cash, you have reduced the amount you can pay in each year to your pension from £40k per annum down to £10K and it is up to you to tell all your pension providers that you have done this within 91 days. This responsibility doesn’t apply if you have simply taken an annuity.

Don’t risk a fine

You may never intend to put that kind of money into a pension anyway but if you don’t tell your other pension providers, you can be fined by HMRC. The fine is £300 initially and then £60 per day until you have dealt with the issue.

Take action

So if you have taken money from your pension that has been taxed, you have more than one pension pot, and you are still paying into a pension (or your employer is on your behalf) let your other pension providers know  as soon as you can and save yourself some unnecessary expense.

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The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment and its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in October 2015. Your personal circumstances also have an impact on tax treatment.