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No higher rate tax on pension pots under £18,000

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06/12/2012
Poorer retirees will no longer have to pay higher-rate tax when they take a small pension pot as cash.

Normally when you take your pension you have to buy an annuity – which provides an income for life from your savings. 

But anyone with less than £18,000 in total pensions can take the whole lot as cash. The taxman calls this ‘trivial commutation’, the Daily Mail reports.

Wealthier savers with small pots worth less than £2,000 can turn up to two of these into cash.

In the case of these small lump sums, HM  Revenue & Customs uses an emergency tax code and charges the higher-rate tax of 40 %.

But the vast majority of savers with small pensions are basic-rate taxpayers. Therefore, they should pay only 20% tax on this sum.

As a result, they often have to fill out a tax return to claim back the additional amount they have paid.

On an £18,000 pot, this left savers paying up to £1,992 too much tax, according to accountants Grant Thornton.

But from April 6 next year, the taxman will charge 20 % on pension lump sums instead. This will ensure no basic-rate taxpayer has to wait for a refund.

 

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