Tax-free money: many people took precautionary money for their pensions before the Budget
Before the Budget, I took out a tax-free sum of 25 per cent of my pension.
I was worried that I would lose out if the rules changed, but they didn’t and now I don’t know what to do with the money.
Can I get it back and if not, what are my options?
Tanya Jefferies of This is Money answers: Fears that the Chancellor would limit the amount of tax-free money that pension savers can take out of their pots have not materialised in recent years. Budget.
But many people have taken the precautionary measure of taking money out in advance, despite warnings that they could miss out on future investment growth under the tax protection of a pension.
It’s worth noting that if you have taken out a defined contribution pension for an amount above your 25 per cent tax-free lump sum, you can only put aside £10,000 a year and still be eligible for tax relief on contributions from then on.
We asked a pensions expert to discuss what people who were receiving tax-free amounts before the Budget might consider doing now.
Helen Morrissey, head of pensions analysis at Hargreaves Lansdown, explains five things to think about.
1. Try to cancel
If you have recently submitted a request to your provider, see if you can undo the request.
Your provider may have a cooling-off period, so if you fall within that period, this may be an option for you.
There are conditions attached, however; this will depend on your provider and your circumstances, including how and when you withdrew your tax-free money.
Helen Morrissey: Recycling rules were introduced to stop people taking their tax-free money and reinvesting it in a pension for an extra bit of tax relief
2. Avoid recycling traps
If you want to reinvest the money into your pension, you need to be aware of the rules for this, otherwise you risk being hit with tax charges.
The recycling rules were introduced to prevent people from taking their tax-free money and reinvesting it into a pension, such as a self-invested personal pension (Sipp) for an extra bit of tax relief.
There are a number of criteria set out in the rules, all of which must be met before it is considered an offence: these are as follows.
– Tax-free money is withdrawn.
– The tax-free money withdrawn in the last 12 months is more than £7,500 (including other tax-free money withdrawn in the last 12 months).
– Contributions to pensions are significantly higher than expected. This applies to personal, employer and third party contributions.
– The value of the premium increase is more than 30 per cent of the tax-free money withdrawn. The recycling rules take into account contributions made in the tax year in which the tax-free money is withdrawn, as well as the two tax years next to it.
– Recycling was planned by the member – the burden of proof is on HMRC to prove that it was a deliberate decision.
If you have broken the rules, you could face a 55 per cent tax charge on the value of your tax-free money.
Any decision to reinvest in your pension should therefore be carefully considered and it is worth seeking advice from a financial adviser to ensure you are on the right side of the rules.
3. Help a family member
You don’t want to take out tax-free money and leave it in an easily accessible bank account where it earns little interest and you risk dipping into it
It’s important to note that these rules apply to contributions to your own pension, not someone else’s. It is therefore possible that you could use the money to top up a spouse or child’s pension, for example, and improve your family’s financial resilience.
You can reinvest up to £2,880 a year into a non-working spouse or child’s Self-Invested Personal Pension (Sipp) and they will receive tax relief of up to £3,600.
4. Invest or save
If you don’t go down one of the above routes, it’s worth considering what other investment options are available to you.
You don’t want to hold tax-free money and then leave it in an easily accessible bank account where it earns a low rate of interest and you risk dipping into it regularly.
If you invest it in a stocks and bonds Isa, you can benefit from the growth of your investments over the long term and enjoy the income you receive tax-free.
If you decide to put some of your money in a savings account, you can use a savings platform to ensure you get competitive interest rates.
If you can hold some of your money for a while (say two years), you can also guarantee the interest at a time when the Bank of England is likely to make cuts. So it’s important to do that. Do your homework on what’s available.
> How to choose the best (and cheapest) DIY investment Isa
> Check out our best buy savings charts
5. Make gifts
Finally, from April 2027, pensions will become part of your estate for inheritance tax purposes.
This is expected to change people’s behaviour and encourage them to ease this burden by drawing income from their pensions rather than other assets.
We could also see an increase in people giving money away while they are still alive, rather than leaving it to someone after they die, and a renewed interest in annuities.
If you are thinking of giving gifts to a loved one, this may be a consideration, but you should be careful not to give too much away and run out of money later in life.
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