HMRC plans one huge rule change as state pensioners told ‘check now’ | Personal Finance | Finance

One of the biggest shake-ups in two decades to the way pensions are taxed is coming into effect next month, affecting everyone drawing money for their retirement.

From April 6, the limit at which pension savings start incurring a tax charge will be removed.

The Finance Bill, which was approved in February, scraps the lifetime allowance, which makes the first £1,073,100 in pension savings tax-free, with a high tax rate of 55 percent for everything withdrawn over that limit.

Treasury minister Nigel Huddleston said the measures put in place by the Bill will “encourage people to stay in work and utilise their expertise for longer”, reports the Manchester Evening News.

The Office for Budget Responsibility estimates that the abolishment of the lifetime allowance would retain 15,000 workers annually.

Mr Huddleston told the House of Commons: “The Bill will complete the abolition of the lifetime allowance, amending pension tax rules so that employees with valuable, hard-earned expertise are no longer encouraged to reduce their hours or retire early.”

Chancellor Jeremy Hunt announced the measure in last year’s spring budget, with the aim of ensuring doctors in particular do not retire early and leave gaps in the NHS workforce.

From next week, the lifetime allowance will be replaced by two new taxes on lump sum withdrawals, which could catch some pensioners out. The new tax rules, known as the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA), will let people take out up to a quarter of the current lifetime allowance, £268,275, from their pension pot before they have to pay tax on it.

But this could mean more pensioners end up paying tax, depending on their scheme.

If you’re getting a defined benefit pension, which is based on your final salary, or a defined contribution scheme, you might only get your payments as lump sums. This means you could reach this tax-free limit quicker than people on other pension schemes.

The LSDBA lets you transfer up to £1,073,100 of your leftover pension allowance to someone else when you die, without them having to pay tax on it. But this amount will be less if you’ve already taken out lump sums during your life, and it could even affect how much tax the person who gets your pension has to pay – unless it’s paid as an annuity or drawdown.

If you’ve been taking money from your pension and have already gone over the current lifetime allowance, you’ll keep paying tax as usual and won’t get any benefits from the new lump sum allowances. Any money you make over the LSA limit will be taxed as income.

What should I do next?

If youre worried about how much of your pension you can claim tax-free, or how you take your pension, speak to a financial adviser as HMRC are bringing in new rules and changes around the new lump sum allowances.

The chartered Financial Advice and Services organisation have some advice for concerned pensioners:.

“Some pension holders could be entitled to additional tax-free cash, in particular if they have taken benefits from a Defined Benefit pension and did not draw the maximum available tax-free cash. Those with specific pension protection may also need to check to see whether the new rules carry any implications for existing defined contribution pension arrangements.”

“In addition, the new Lump Sum and Death Benefit Allowance could lead to more beneficiaries paying tax when receiving pension benefits following the death of the pension holder; however, this can normally be avoided by ensuring that Beneficiary Flexi-Access Drawdown is an option under the pension contract.”

“It is important to note that not all pension arrangements offer Beneficiary Flexi-Access Drawdown and it is therefore worth checking that this is an option under an existing pension plan. If it is not an option, it may be worth considering whether the existing pension arrangement is appropriate, and if any action is needed to move the pension to an alternative plan.”

“It has always been important to complete an Expression of Wish declaration on a Defined Contribution pension, to guide the pension trustees on who you would like your pension benefits paid to. The new rules only strengthens the need to ensure a valid nomination is in place, so that the option to draw benefits under Beneficiary Flexi-Access Drawdown is available.”

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