Personal finance experts are issuing an urgent warning to new state pensioners about a simple trick that could save them from a significant and unexpected tax bill. The advice comes as many face being placed on an emergency tax code when they first access their pension pot.
The £100 Solution to a Costly Problem
According to a report from This is Money, individuals beginning drawdown at retirement should consider taking a very small initial sum from their pension. The recommended amount is just £100. This strategic first move is designed to trigger the tax system without incurring a large, unnecessary charge on the entire amount a retiree wishes to withdraw.
The core of the issue lies with HMRC, the UK's tax authority. The system has not yet been adapted to avoid applying an emergency tax code on the first withdrawal from a pension. This often results in people being overtaxed, forcing them to navigate a lengthy process to reclaim the money they are owed.
How the Pension Withdrawal Strategy Works
By taking a nominal £100 first, the pensioner allows the emergency tax code to be applied to that trivial sum. Once this initial administrative hurdle is cleared, the system is primed for the next transaction. The retiree can then make their second withdrawal for the actual income they require, and this subsequent payment should be taxed at the correct, standard rate.
Financial advisers stress that being well-prepared before accessing a pension is crucial for making informed decisions. Proper planning helps ensure you have enough funds to maintain your standard of living in retirement while avoiding unnecessary financial difficulties and tax charges from the outset.
What to Do If You've Already Been Overtaxed
For those who have already taken a larger first withdrawal and find themselves facing a shock tax bill, the advice is to act swiftly. Affected pensioners should contact HMRC directly to initiate a claim for a refund. While the money can be reclaimed, the process can cause significant delays in accessing much-needed cash during retirement.
By following this straightforward tip of a small initial withdrawal, soon-to-be retirees can sidestep a great deal of stress and administrative hassle, ensuring a smoother and more financially predictable start to their retirement.
