Pension Freedoms Threaten to Push 60,000 into Higher Tax Bracket
WORTHING, England, November 17, 2014 /PRNewswire/ --
MGM Advantage, the retirement income specialist, is warning that around 60,000 people[1] could potentially fall prey to the higher rate tax bracket from next April, having taken advantage of the new pension freedoms.
People who have been used to paying tax under the Pay As You Earn (PAYE) system at the basic tax rate could find themselves being drawn into the higher tax bracket for the first time, and potentially being landed with an unexpected tax bill down the line.
Even those earning £33,288, the average income for a pre-retiree, taking little more than £20,000 as a lump sum from their pension, would find themselves pushed into the higher rate of tax for a portion of their pension payment. Those taking a larger lump sum would find themselves paying a significantly higher effective rate of tax than they are used to.
Andrew Tully, pensions technical director, MGM Advantage, explains: 'The pension freedoms bring a new level of complexity and choice in how people access their pensions. One of my concerns, even with conservative estimates, is that many people could find themselves being dragged into the higher tax bracket and the self-assessment tax system for the first time. This could mean people either pay too little tax or too much tax, as well as the potential for hefty fines[2] from HMRC for people who don't complete their self-assessment on time.
'Once you've taken the money, you can't change your mind. This is an irreversible decision from a tax perspective, and could leave people wondering why they receive a tax bill further down the line. They may then not have the money available to pay their tax bill.
'Our research shows that the awareness of the tax implications of pension lump sum withdrawals is low, so there is a clear danger of people making ill-informed decisions. At a time when people have access for the first time to possibly the largest single sum of money in their lives, well-informed decisions based on the facts will be crucial in ensuring good customer outcomes. Proper financial advice will play a key role.'
MGM research[3] shows there is a concerning lack of understanding around the implications for taking the whole pension pot as cash, with 59% of people aged over 55 saying they do not understand the tax implications of such a move. The research also shows when the tax implications are explained, people are far more likely (83%) to leave their money in a pension wrapper and draw an income as needed, rather than taking the entire pot as cash in one go. 17% say they are happy to pay tax on any withdrawal.
Worked example[4]
The tax implications of the pension freedoms could be significant, even for those on average incomes.
If you earn £33,288 in 2015/16 tax year (the average annual salary according to the ONS for a pre-retiree), and you take a pension lump sum of £20,000, then the first 25% is tax-free (£5,000), and the remaining £15,000 is taxed as income. Earnings of £33,288 plus the £15,000 taxable portion of the pension lump sum make a total income of £48,288, taking the individual over the higher rate tax threshold of £42,285. The tax paid on the £15,000 pension payment is £4,200.60, or an effect rate of 28%.
MGM Advantage has an online calculator to help show people how much tax they could pay on lump sum withdrawals from their pensions from April 2015, which can be found here http://www.mgmadvantage.co.uk/calculator/
Notes to editors
- The Budget announced unprecedented flexibility and choice in how people can use their pension savings in the future. From April 2015, people over 55 can choose to withdraw their pension savings as they wish, although this will be subject to their marginal rate of income tax in that year.
Source: analysis[1] of ONS and ABI data by MGM Advantage. The ASHE survey for earnings 2013 shows the average UK salary before retirement is £33,288. ABI data shows there were just over 120,000 annuities sold last year with a value of between £10,000 and £30,000. If half these people cash in their entire fund and withdraw it on day one, they would all be liable to a portion of their fund at the higher tax band of 40% and are likely to be required to complete a self-assessment.
- Penalties for late completion of self-assessment return
If you miss the deadline to file a tax return HMRC will charge a penalty of £100. The following fines are levied for subsequent missed deadlines:
* More than three months late - A penalty of £10 a day for up to 90 days giving a maximum of £900. This is in addition to the fixed penalty above, so the overall fine could be £1,000.
* More than six months late - A further penalty of either £300 or 5% of the tax due, whichever is the higher, will apply on top of the penalties above.
* More than 12 months late - Another £300 fine or 5% of the tax due, whichever is the higher, will be added to your bill on top of the penalties above. In serious cases you may be asked to pay up to 100% of the tax due instead, as well as any tax you owe, doubling your payment.
In addition there are penalties for paying your tax late
* 30 days late - you will pay 5% of the tax you owe at that date
* 6 months late - you will pay a further penalty of 5% of the tax you owe at that date.
* 12 months late - you will pay a further penalty of 5% of the tax you owe at that date.
These penalties are in addition to any penalties for sending your tax return late. You will also have to pay interest on anything you owe and haven't paid, including penalties.
- Source: Research carried out online among 1000 respondents aged 45-65 by Onepoll, all who are paying into a pension. 299 people were aged 56-65. Fieldwork was completed 23 May 2014 - 27 May 2014.
- Source: MGM Advantage, based on calculations using the income tax personal allowance for those born after 5 April 1948 and the basic rate limit for 2015-16. http://www.hmrc.gov.uk/tiin/2012/tiin1080.pdf
About MGM Advantage
Follow MGM Advantage on Twitter: http://twitter.com/MGMAdvantage or find us on Facebook: http://facebook.com/MGMAdvantage and Linkedin.
MGM Advantage is a retirement income specialist, innovating, growing rapidly and working hard to make the most of people's money in retirement. From offices in London and Sussex, the provider sells its products through financial advisers.
The company attracted the backing of private equity investors TDR Capital, with the deal concluding in late 2013. This resulted in the creation of a new life company using the MGM Advantage brand, and resulted in a split from the mutual society (Marine and General Mutual). The strategy set out in 2008, to focus on the retirement income market, is retained.
MGM Advantage's market leading products include an investment-linked annuity, the Flexible Income Annuity, the first retirement income product to be rated five stars by Moneyfacts. This gives customers the flexibility to change income levels at different stages of retirement and the potential for growth and therefore, the potential to negate the impact of inflation. It also provides a minimum income guarantee and death benefits. Enhanced rates are also available for the Flexible Income Annuity.
MGM Advantage also specialises in providing enhanced annuities designed to provide additional income in retirement for people with health conditions, a poor medical history, or lifestyle conditions, for example smoking.
Through new product innovation and development MGM Advantage is always looking to find ways in which its customers can improve their retirement income, and encourages people approaching retirement to shop around for the best annuity.
MGM Advantage is part of a group of companies owned by ICE Acquisitions SARL (ICE Group). This group of companies includes the new life company (MGM Advantage) and a service company (MGM Advantage Services Limited). MGM Advantage manages assets in excess of £1.4bn (as at December 2013).
For further information
MGM Advantage
Paul Keeble
+44(0)7833-085387
paul.keeble@mgmadvantage.com
Share this article