Five years on from Pension Freedoms, flexible payments retain their popularity

The most recent Official Statistics on flexible pension payments covering the first quarter of 2020 show a 19% increase in the amount withdrawn from pensions flexibly, increasing from £2.1 billion in Q1 2019 to £2.5 billion in Q1 2020.

The number of individuals making withdrawals saw an increase of 23% over the year, up to 348,000 compared to 284,000 in the same quarter of 2019.

The average withdrawal in Q1 2020 fell slightly to £7,100, down from £7,300 in Q1 2019. The statistics have shown average withdrawal amounts consistently decreasing since reporting became mandatory in Q2 2016 with peaks in Q2 of every year, again in line with the start of the tax year.

The decrease in average withdrawals suggests fewer people are paying unnecessary income tax on large withdrawals which is good news, however, advice is still essential to ensure money is taken in the most tax efficient way.  For example, ensuring client’s withdrawals don’t take their income into higher marginal tax rates when funds are available from other sources or withdrawals could be split over two or more tax years.

Taking funds using the small pots rules where possible can have advantages.  Unlike an uncrystallised pension lump sum or flexi access drawdown income, a small pot will not trigger the money purchase annual allowance.  In addition, a small pots payment does not use up any of the client’s lifetime allowance. 

Even where careful planning is sought, due to the way withdrawals are made under the PAYE system too much tax is often deducted at source as providers may have to apply an emergency tax code on flexible payments.  Even where providers have the correct tax code, where large one-off withdrawals are taken early in the tax year this can lead to substantial amounts of tax being deducted at source.  Where this occurs clients can make a reclaim during the tax year.

HMRC has recently updated its online forms needed to reclaim overpaid PAYE on flexibly accessed pensions.  To reclaim tax within the same tax year the following forms should be used

• P50Z to reclaim an overpayment of tax when a member has ceased employment and flexibly accessed their pension fund.
• P53 to reclaim an overpayment of tax when a member has taken a trivial commutation lump sum or a small pot lump sum.
• P55 to reclaim an overpayment of tax when a member has flexibly accessed part of their pension pot.

• P53Z to reclaim an overpayment of tax when funds have been flexibly accessed and the fund extinguished.