Pension warning as contribution mistake could land you hefty 70% HMRC charge

Experts are warning there could be changes to pension taxes in the Autumn Budget

Pension savers looking at shifting their funds ahead of tax changes in the Autumn Budget could end up with a large HMRC bill to pay. Analysts suggest Chancellor Rachel Reeves may target pension tax-free allowances, potentially reducing the amount that can be taken as a tax-free lump sum.

Currently, up to 25 percent or £268,275 of a pension pot can be withdrawn tax-free as a lump sum. However, those rearranging their finances could face a 70% charge if they 'recycle' tax-free cash into another pension scheme and exceed certain limits, potentially leading to multiple charges.

Helen Morrissey, head of retirement analysis from Hargreaves Lansdown, highlighted the risks of pulling money out of your pension. She explained: "Ripping money out of a pension now potentially deprives it of future investment growth and could leave it subject to a whole host of taxes that it otherwise might not be, such as inheritance, capital gains, dividend and income tax.

"We could also see people try to reinvest surplus tax-free cash they’ve taken back into their SIPP and potentially fall foul of recycling rules that clobber them with a fine."

Unauthorised payments could be subject to HMRC charges of:

• A charge of 40 percent for the scheme member
• A surcharge of 15 percent for the scheme member
• A scheme sanction charge of 15 percent for the scheme provider.

You could be hit with the charge if you exceed these limits:

• You pre-planned the transfer
• The tax-free amount received over 12 months is above £7,500
• The amount you put into your pension is at least 30 percent of the tax-free cash, across the current tax year and the two tax years either side
• The amount you pay into your pension is larger than your normal contribution, which normally means more than 30 percent higher then usual.

Ms Morrissey also had a warning for those thinking of moving their pensions cash into savings accounts. She said: "Even if the money is put in a bank account, there is a huge risk its purchasing power is eroded over time by falling interest rates."

The expert called for clear answers about pension tax changes, warning that the rumour mill could be harmful. She stated: "This ongoing speculation about potential changes to such a fundamental part of the system is hugely damaging.

"People need certainty to make long-term plans and they just don’t have that right now. The sooner changes such as raiding tax-free cash, can be ruled out, the more people can focus on the long term again."