HMRC sent out hundreds of tax bills worth as much as £98,700 each for those trying to spend their pensions.
HMRC is issuing tax bills to people spending their pension (Image: Getty)
HMRC is sending huge tax bills to people making withdrawals from their pension – of up to an eye-watering £98,700 each. According to analysis from financial experts at Standard Life, almost 300 people cashed out a pension of more than £250,000 in a six-month period, landing them with a ‘minimum’ tax bill of £98,700 each from HMRC. Private or workplace pensions are built up through your earnings, and unlike the state pension can be accessed from the age of 55 (although this is rising to 57 in 2028).
Although pension contributions are tax-free at the point of saving, they can be taxed later at withdrawal, landing many with a large unexpected bill. Standard Life said 292 people ‘fully encashed’ a pension of over £250,000 between October 2023 and March 2024, paying a minimum of £98,700 each in tax in the process.
Another 1,593 people fully encashed between £100,000 and £249,000, leading to a tax bill of at least £27,400 each.
The firm said that a huge number of people are paying too much to access their pension savings and urged those needing to dip into their pension to be more savvy to avoid tax legally where they can.
Mike Ambery, a retirement savings director at Standard Life, part of Phoenix Group, said: “A huge number of people are paying a disproportionate amount of tax to access their pension. It’s impossible to know whether their individual circumstances warranted them taking such a big tax hit, but for the vast majority of people it’s something they’ll want to avoid.
“When deciding how to take your retirement savings, it’s important to know that most pension income is eligible for tax, like other income.
“Fully encashing a large pot will almost always mean a very large tax bill, sometimes taking away many years’ worth of savings. While some people want to withdraw their entire pension and put it in their bank account for ease of access, this can be financially detrimental.
“Not only does this mean their savings become eligible for tax but it also means they’re potentially giving up investment returns. The good news is there are ways to make withdrawing your retirement savings more tax efficient and it’s possible to spread your withdrawals over many years which can be more efficient.
“Taking just one option at retirement, such as just cash or an annuity could mean you miss out on an opportunity to maximise tax efficiency and consider your financial needs in the round.
“It’s worth considering a combination of flexible and guaranteed income which could help you achieve the best of all worlds – you could, for example, annuitise a portion of your income to cover essential outgoings, and leave the rest in drawdown to access as and when you need it. Be sure to speak to your pension provider about your options, and ideally seek advice or guidance when taking your pension.”
Mr Ambery urged people to use legal ways of avoiding tax on pensions.
He added: “The simplest way to avoid paying too much tax is to make sure you don’t take any more from a pension pot than you need to. Taking it in small, regular chunks could keep your tax bill down.
“Remember, you only pay income tax on anything over your Personal Allowance. So, if a pension pot is your only source of income, you could take £12,570 from it each tax year and not pay any tax on it at all.
“On the other hand, if you were to take multiple large lump sums from your pot in the same tax year (outside of your 25% tax-free entitlement), you could potentially find yourself pushed into a higher tax bracket.”
He added: “Remember you don’t necessarily need to take all of your tax-free lump sum in one go. You can usually take it in chunks over a number of months or years – as long asthe type of pension plan you have lets you do this.
“So you could choose to take a withdrawal from the taxable portion of your pot, and top it up with some of your tax-free amount. In theory, every month, you could take £1,000 from the taxable part of your pot (staying under your £12,570 personal allowance) and £1,000 from your tax-free part. That would give you an income of £2,000 each month without paying any tax at all. This is just an example – you can usually switch up the amounts to suit you.
“We call this ‘tailored drawdown’.”
