The £1 pension trick that could save you losing thousands to emergency tax
Those looking to withdraw from their pension but avoid pesky emergency taxes could have a new method to avoid superfluous charges.
Since January, an estimated £44,000,000 has been reclaimed by pensioners withdrawing money from HMRC.
But for some who need to make larger withdrawals, an emergency tax is charged and can take a lengthy amount of time to get back.
To avoid this, an expert has revealed a unique way you could avoid a hefty tax on a withdrawal, dubbed a '£1 pension hack'.
When you make a large withdrawal from your pension, it's not seen as normal by HMRC – so they place an emergency tax on it.
Those above 55 are currently able to make flexible withdrawals from their pension – the first 25% of withdrawals are tax-free, but anything over that is taxed at the highest rate.
How can you avoid this tax?
Pensions expert Clare Moffat explained that you could avoid this by taking a smaller amount out of your pension to get a tax code generated, then, withdraw the amount you actually need to avoid the emergency tax.
This method is called '£1 pension hack' because the small amount you initially withdraw could be as little as just a pound.
But Ms Moffat added: 'How much you would need to take out would depend on your provider, so you need to check with them first.
'But even if you can't take £1 out, taking out £100 may still be enough to generate a tax code from HMRC that the provider can apply.'
Though the trick does work, you may have to submit a tax reclaim form if you are still taxed a high amount – which can be reclaimed later if needed.
Last year, it was revealed that the UK trails behind much of Europe when it comes to the generosity of our pensions, compared to the salaries pensioners made while they were working.
Statistics show Brits make an average of 54.4% of what they earned as a worker once they start withdrawing their pension. More Trending
By contrast, pensioners in Portugal make close to 100% of their previous earnings, according to research from the OECD, and the EU average is 68.1%.
The OECD's statistics show that the UK pension 'replacement rate' – meaning the percentage of an average working salary that a person can expect to receive as a pension – is roughly similar to that of Norway and Germany.
People from Turkey, the Netherlands and Greece could expect to receive 90% or more of their previous earnings when they take out their pension.
Want to see how your pension compares to the rest of Europe? Take a look here.
Get in touch with our news team by emailing us at webnews@metro.co.uk.
For more stories like this, check our news page.
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