The latest flexible pension payments statistics show some signs of better tax planning

The number of individuals making withdrawals saw an increase of 27% over the year up to 327,000. This was a slightly lower number than in the previous quarter but reflects the seasonal trend where more people withdraw funds at the start of the tax year.

The average withdrawal in Q3 2019 fell slightly to £7,250, down from £7,600 in Q3 2018. 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 coupled with increases in the personal allowance and basic rate tax bands suggests fewer people are paying unnecessary income tax on large withdrawals, however, advice is still essential to ensure money is taken in the most tax efficient way. 

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. Where this occurs clients can make a reclaim during the tax year.

To reclaim tax within the same tax year the following forms should be used:

• P55 to reclaim an overpayment of tax when funds have been flexibly accessed but the fund has not been extinguished.
• P50Z to reclaim an overpayment of tax when funds have been flexibly accessed and the fund extinguished and the client has also ceased to work or claim benefits.
• P53Z to reclaim an overpayment of tax when funds have been flexibly accessed and the fund extinguished.
• P53 to reclaim an overpayment of tax on a trivial commutation lump sum or small pension pot taken as a lump sum.

The statistics here also provide some signs of increased awareness of this option. In the third quarter of 2019, just under £55m was reclaimed using this process up around 43% from just over £38m during the same quarter in 2018.  

With the average flexible payment being less than £10,000 a better option can be making the withdrawal under the small pots rules where possible. With a small pot, 25% is payable tax free and the rest is taxed at a flat 20% tax. This means there is no requirement for basic rate taxpayers to make any reclaims. This is in addition to the other advantages offered by small pots in relation to the annual and lifetime allowances.