Monthly Archives

September 2022

Newspaper headline 'Markets' - Kwasi Kwarteng statement market update

Market Update – when others are fearful…

By | Investments

The events since Friday

Much has happened in markets since Kwasi Kwarteng began his statement to the Commons on Friday morning. Currency markets reacted first, with the Pound slipping further against a strong Dollar, reaching an all-time low (at the time of writing) of $1.05, and also losing ground against the Euro. The price of Gilts – loans issued by the UK Government to fund its liabilities – also fell heavily, as investors sold off the bonds, leaving the Government with a higher interest bill on existing debt.

The perception from global investors appears to be that UK economic policy is heading in the wrong direction. Announcements from the Chancellor that a spending review and full statement would follow in late November did little to improve the mood of Sterling or Gilt markets, and following a fall in Gilt prices on Tuesday, the Bank of England announced a return to Quantitative Easing, by starting to purchase longer dated Gilts in unlimited quantities, albeit for a limited period, which has helped stabilise long dated Gilt prices. This move came after concerns were raised by defined benefit pension trustees, where final salary pension liabilities, which are largely linked to Gilts, came under financial pressure.

There have been calls for the Bank of England to raise interest rates ahead of the next scheduled meeting on 3rd November; however, the Bank has resisted these calls, for now at least, but a large increase in base rates is expected at this meeting. As a result of the expected higher interest rates, mortgage lenders have been pulling fixed rate deals from the market and relaunching the same deals with higher rates. This is likely to have a dampening effect on the UK housing market.

We wait to see what effect the Bank of England’s actions will have, although we see the intervention in Gilt markets as being necessary given the weakened sentiment. The International Monetary Fund and currency markets have given their initial opinion on the fiscal announcements made by the new Government, and we would anticipate further moves will be made by both the Treasury and Bank of England to calm markets over the coming days and weeks.


The impact for UK investors

Sterling’s weakness is something of a double-edged sword for UK investors. As the UK are net importers of goods and services, a weak currency pushes up the price of these imported goods and stokes the inflationary fire already ablaze. This, together with the general market perception of the strength of the UK economy, will likely lead to higher interest rates as the central bank tackles inflation.

For holders of UK shares, however, a weak Pound may be beneficial, particularly if the company generates profits overseas. And holders of Global Equities have seen losses largely cushioned by Sterling’s weakness. This underlines the importance of holding a globally diversified portfolio – a key component of our investment strategies – in these conditions.

For investors in Fixed Interest securities, this has been an uncomfortable period. Bonds tend to be assets that provide stability in times when Equities markets are volatile; however, the rapidly increasing inflation and higher interest rate expectations have sent Bond prices lower over the course of the year. As a result, Bond yields have now risen to attractive levels and both Investment Grade and High Yield Bonds are offering good value to investors who are happy to take a medium to long term view.


Markets always look forward

In conditions such as those we are experiencing at the present time, it is important to remember that markets are a discounting mechanism, reflecting future earnings that companies will generate. As such, the difficult market conditions seen over the course of this year will, to some extent, have already discounted the impact of higher inflation and interest rates on the global economy. This discounting of future earnings can provide opportunities for investors. This is a view shared by leading Fidelity fund manager Aruna Karunathilake who commented earlier this week “We are getting excited by the opportunities in the market – not because the outlook is improving, in fact the opposite is true, but because this very negative outlook is now being reflected in share prices in selected areas of the market.”

Looking a little further ahead, we continue to expect inflationary pressures to abate over the course of the next 12 months. The expected slowdown in the global economy, together with the monetary policy decisions taken by central banks, should bring inflation back down to more modest levels, and, indeed, inflationary pressures could ease significantly should progress be made towards a resolution in the conflict between Russia and Ukraine.

On the assumption that inflation falls back next year, the focus will then shift to see whether central banks can begin to unwind the base interest rate increases seen over the course of this year, and provide monetary stimulus to kick-start growth.


The importance of diversification

Clearly the events of the last few days have rattled Bond and Currency markets, and time will tell whether further intervention or policy change will be forthcoming. However, for investors willing to take a medium to long term view, these conditions present a number of interesting opportunities. As renowned investor Warren Buffett famously quipped, “be greedy when others are fearful”.

Market performance over this year has only served to reinforce our conviction in global investing. Holding assets in a diversified portfolio, with money allocated across western economies, can provide shelter when specific localised concerns arise, such as we are seeing in the UK at the current time.

Given the slowing economy, it is also apparent that investors should look to focus on the strongest companies through this period, be they through Equity or Bond investment. Companies with good levels of cash flow, resilient earnings and the ability to pass on price increases to their customers should be able to withstand the testing conditions.

At FAS, our Investment Committee will continue to stay in close contact with fund managers and we will remain watchful for opportunities in the current conditions.

If you would like to discuss markets further then speak to one of our experienced advisers here.


Fidelity Risk Warning
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Graphic illustrating Budget planning 2022-2023 - The Not-so “Mini” Budget

The Not-so “Mini” Budget

By | Financial Planning

Simply announced as a “fiscal event”, the series of announcements made on Friday may well have more impact than many full-blown Budgets have had over recent years. Aimed at delivering growth, the Chancellor reversed a number of policy decisions and announced some surprise measures in the statement, too.


Additional Rate scrapped

Perhaps the most eye-catching of the announcements was the removal of the 45% Additional Rate Income Tax band. This rate is currently payable on income earned over £150,000. From 6th April 2023, the maximum rate of Tax payable on income will be 40%.

We await clarification in respect of the impact this could have on Trusts. Currently, Discretionary Trusts pay tax equivalent to the additional rate (45% on Trust income over the first £1,000 of income, and 39.35% on dividends) and it is not, at this stage, clear whether Trusts will realign with the new highest rate of Income and Dividend Tax. Further information is likely to be revealed when the Finance Bill is published.

With the removal of the Additional Rate Band, the Personal Savings Allowance of £500 will also become available to those whose income is currently within the Additional Rate Band. Under the current rules, anyone with income over £150,000 does not benefit from the Personal Savings Allowance, which covers the first £500 of savings income.


Income Tax cut brought forward

Previously announced as a policy measure due to come into force in 2024, Kwarteng has brought forward the 1p cut in the basic rate of Income Tax by 12 months, to take effect from 6th April 2023. The basic rate of tax will fall from 20% to 19%, and this will apply to earned and savings income. The current rate of relief of 20% will be maintained for Gift Aid charity donations until April 2027.


Reverse over Social Care

Previously announced by former Chancellor Rishi Sunak, the Government have reversed the planned policy decisions designed to raise funds to help provide for the social care budget. The 1.25% National Insurance hike for Employees and Employers will be scrapped from November 2022, and the Dividend Tax rate hike, which was implemented in April 2022, will also be reversed from next April.

For Basic Rate taxpayers, Dividend Tax will revert to 7.5% from the current 8.75%, with Higher Rate Taxpayers paying 32.5% once again, rather than the current 33.75%. Coupled with the removal of the Additional Rate Tax Band, the maximum rate of Dividend Tax payable from 6th April 2023 will be 32.5%, which could present opportunities for business owners to draw more from their business in a tax efficient manner from this date.

The reduction in Dividend Tax rate will also benefit those with large investment portfolios held outside of tax-efficient wrappers, such as an Individual Savings Account (ISA).


Pension changes

There were no major announcements in respect of Pensions. With the reduction in the Basic Rate, and removal of the Additional Rate, from 6th April 2023, the maximum rate of Income Tax relief on pension contributions will fall to 19% for Basic Rate Tax payers, and a maximum of 40% for Higher Rate taxpayers.

Despite the Basic Rate Income Tax reduction coming into effect in April 2023, the Growth Plan suggests that pension schemes that arrange contributions on the relief at source method (i.e. personal pensions) will still be able to claim Basic Rate relief at 20% until April 2024.

This presents an opportunity to gain an additional 1p of Basic Rate relief on contributions in the 2023/24 Tax Year.


Venture Capital Trusts secured

A feature of European Union state aid rules was that a “sunset” clause on Venture Capital Trusts (VCTs) was due to come into force in 2025. This could have meant that new investments in VCTs may not have qualified for relief from 2025. However, in a move designed to boost UK entrepreneurship, this deadline has now been removed, which secures the future of Venture Capital Trusts.

In addition, Kwarteng announced an extension of the Seed Enterprise Investment Scheme (SEIS) limits, with companies being able to raise £250,000 of SEIS investment, rather than the current £150,000 investment.

The support of VCTs and other tax-efficient investments is welcome, as this has proven to be beneficial for small business looking to raise funding for expansion, together with offering attractive tax breaks for investors.


Stamp Duty Land Tax

As part of measures designed to help the housing market, the Stamp Duty Land Tax (SDLT) threshold for residential properties has been doubled from £125,000 to £250,000. This will mean that no SDLT will be payable on properties up to £250,000. For first-time buyers, the relief has been extended, with the first £425,000 – instead of the current £300,000 – being exempt from SDLT. This relief is available on properties up to £625,000 in value.

These changes may well support the lower end of the housing market; however, there has been no change to the rates applying for higher value properties. The 3% levy on additional properties purchased will also continue unchanged.


Corporation Tax changes axed

The intended increase in Corporation Tax, scheduled for 6th April 2023, has been axed. The rate of Corporation Tax would have increased to 25% from next April; however, it will now remain at 19%, and presents an opportunity for business owners to rethink plans to draw profits over the current and next Tax Years.


In Summary

The announcements were certainly eye-catching and we wait to see whether the new legislation will have the desired impact on growth. The initial market reaction has been fairly clear, given the slump in the Pound against the Dollar immediately after the measures were announced.

From a financial planning perspective, these new rules present interesting opportunities for business owners, those with share portfolios and individuals saving through a pension, to review their current arrangements.

If you feel a comprehensive review of your financial planning objectives and plans would be beneficial, then speak to one of our experienced advisers here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Mature couple discussing finances - Avoiding the Pension Death Benefit pitfalls

Avoiding the Pension Death Benefit pitfalls

By | Pensions

When saving into a pension, the primary objective is to look to provide an income in retirement. In our experience, when first meeting clients, many have not considered what would happen to their pensions in the event of death.  It is quite normal for individuals to have built up pensions through different types of schemes and arrangements during their working life, which can add to the confusion, as different pensions may well be treated differently on the death of the pension holder. Taking the time to understand how the pension will be treated on death is an important step to successful planning, and this is an area where independent financial advice can add significant value.


Final Salary benefits

For those individuals holding Defined Benefit (i.e. Final Salary) pensions, the treatment on death will normally depend on the scheme rules. It is normal for the pension to provide an ongoing pension to a dependent on death of the pension holder, which is usually a surviving spouse, or potentially any children aged under 23. Often this will provide 50% of the annual pension to the dependent, although it is important to check the scheme carefully to determine the precise rules that apply to that scheme.


Pension Freedoms and Defined Contribution pensions

The death benefit rules for Defined Contribution pension arrangements changed significantly in 2015, with the age at which the pension holder dies being the determining factor as to how the pension is taxed in the hands of beneficiaries. Prior to 2015, whether money had been taken from the pension or not was used to determine how the pension benefits were taxed.

Under the new rules, if an individual dies after the age of 75, the fund can be paid to a beneficiary as a lump sum, annuity or a drawdown pension. Any funds drawn will be taxed at the marginal rate of the beneficiary. In other words, if the beneficiary is a basic rate taxpayer, assuming the pension income doesn’t push the beneficiary’s overall income above the higher rate threshold, the income will be paid net of 20% tax.

If the pension holder dies before the age of 75, the same options – lump sum, annuity or drawdown pension – remain; however, the main difference is that the payments will be made entirely tax-free.

For beneficiaries in receipt of pension death benefit rights, the options open can appear daunting, and we recommend beneficiaries look to take independent advice which is tailored to their specific circumstances. Often, the decisions could trigger unforeseen tax consequences, and there could therefore be a cost of not considering the various outcomes carefully before proceeding.


A final test

The Lifetime Allowance is the maximum permitted level of pension savings an individual can accrue before a tax charge applies, and currently stands at £1,073,100. If a pension holder dies before the age of 75, this triggers a test of the Lifetime Allowance and if the deceased pension holder breaches this Allowance, a tax charge will apply. How the beneficiary receives the pension has an impact on the level of tax charge that will be levied on the pension, and again this is a point that needs consideration by beneficiaries.


Make sure nominations are up to date to avoid death benefit pitfals

A very common misconception is the beneficiary of a Defined Contribution pension follows the wishes set out in an individual’s Will. This is not the case, and pension trustees will consider a Nomination or Expression of Wish completed by the pension member. The pension trustees have the ultimate discretion as to whom pension death benefits are paid; however in practice, assuming a Nomination has been made on the pension, the trustees will pay to the nominated beneficiary or beneficiaries, unless there is a good reason why they should consider someone else.

It is important to make sure that Nominations are up to date on a defined contribution pension arrangement, so that they continue to reflect an individual’s wishes. A new Nomination can be completed at any time that overwrites the existing Nomination held by the pension company.


Passing assets down the generations

Pensions have always proved to be a very tax efficient way of saving for retirement. In addition, they can also be a very effective method of passing assets to the next generation without a potential charge to Inheritance Tax applying to the value of the pension. As a result, pensions often play an important role in wider financial planning when estates could become liable to Inheritance Tax in the future.


The importance of advice

The rules around death benefits paid by pensions are complex. For Defined Contribution pensions, the introduction of the pension freedom rules in 2015 have led to a number of distinct opportunities to make tax efficient decisions that can have a significant impact on the level of income received by a beneficiary and the amount of Tax deducted from the pension payments. When beneficiary drawdown is selected, regular reviews of the rate of drawdown and investment strategy employed can maximise the potential for the pension to provide the beneficiary with income for the long term.

It is also important to tackle these issues shortly after the death of the pension holder, in particular if they died before the age of 75. Failure to take the appropriate action within two years of the scheme being notified of the death can lead to a potentially tax-free payment becoming taxable.

As we have demonstrated, there are many considerations in dealing with a pension in the event of the death of the pension holder. Taking practical steps to review existing arrangements can help you understand how the particular pensions will be treated.

If you would like to review your existing pension arrangements, then contact one of our experienced advisers here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Wooden signpost with two arrows, one reading Active one reading Passive - Do Active Managers add value

Do Active Managers add value?

By | Investments

The retail fund management industry, which was established in the 1920s, was built on the creation of actively managed pooled investment funds, where fund managers and management teams take frequent investment decisions to their portfolios, with the aim of beating a particular benchmark or target index return. The 1970s saw the creation of a challenger to the fund management industry, when the first index tracking funds were launched. These are funds that operate with far less human interaction and decision making, and manage funds by looking to mirror or track the performance of a particular index or set of indices.

Index tracking funds have steadily gained popularity as the decades have passed, so much so that the amount of new money invested in passive investments now outstrips actively managed funds. However, despite the rise in passive usage across the world, the debate still rages as to which approach can yield the best returns for investors. As we will demonstrate below, we feel that both approaches have merit, and combining the two distinct investment styles can often be an appropriate solution.


Active can outperform

The key difference between the potential returns from an active approach is that the fund can beat returns achieved by the market generally, if the fund manager or team get the investment calls right and hold more in positions that perform well. This is simply not possible through a strict passive approach, where the returns can only mirror (or usually lag slightly behind) the returns achieved by the representative index. As the main driver for most investors is to seek outperformance, this places active funds at a distinct advantage; however, this is only the case if the active manager or team can consistently beat their benchmark.

Another potential positive is that active managers have the flexibility to adjust their portfolios in periods when markets perform less well, therefore potentially reducing the impact of a period of weakness on the fund’s performance.

However, the success of the strategy will largely be dependent on the skills of the manager or management team, and the analysts they employ. Some active fund managers have built up a strong track record of outperformance over many years, and have proven themselves over a range of different market conditions. There are others, however, where performance has lagged benchmarks consistently, and therefore careful analysis of the approach, style and past performance of the fund manager are factors investors need to consider when selecting actively managed funds.

The teams of analysts and fund managers employed to manage an actively managed fund do, naturally, increase the running costs of the fund. This is passed on to investors through higher charges than are typically charged when holding a passively managed fund. For this reason, it is important to achieve good value for money when considering active funds.


The positives of passives

When investing in a passive fund, the first important point to consider is that you are highly unlikely to outperform the representative index that the passive fund aims to track. Even passive funds that fully replicate an index are likely to underperform the index slightly due to charges and tracking error.

It is also important to note that the very nature of passive funds means that the performance is purely driven by that of the underlying index. There is no ability for a human fund manager to take decisions to protect a portfolio in periods when markets perform less well. For example, a fund manager of an active fund could look to increase cash positions within the portfolio, or reallocate the balance of the portfolio to take advantage of underlying conditions.

That being said, there are distinct advantages that a passive fund can provide. Firstly, as the fund tracks an index, the investment will provide exposure to a good proportion, or indeed all of the constituent holdings within the index. This provides good levels of diversification across a range of different sectors, which is difficult to achieve from an actively managed approach. That being said, we often review actively managed funds where the portfolio does not deviate significantly from the composition of the underlying index. If an active manager was closely replicating an index, it begs the question what are you, as the investor, paying for?

Low charges are the other area that passives have an advantage. Given the lack of a human manager, passive fund management charges are generally much lower than active funds.


No winner, but plenty to consider when asking ‘Do Active Managers add value?’

As you can deduce from our analysis above, both active and passive investment management styles have features that make them attractive to investors. At face value, a passive investment approach is the most cost effective method of investment, and also potentially offers greater diversification over an active approach.

However, there may be a cost to using passives, which is the potential underperformance compared to an actively managed fund which outperforms the representative market and its’ peers. Given that active managers can often outperform the benchmark by several percentage points of performance each year, and potentially often downside control through asset allocation, this makes quality active funds an attractive proposition. But what if an active manager runs into a rut, where performance disappoints and lags the performance of similar funds? This is a situation avoided by a passive fund, and therefore when selecting active funds, there is heavy reliance on choosing the right fund from thousands of funds available to UK investors.

Our Investment Committee at FAS undertake regular and comprehensive due diligence across a very wide range of funds available to UK investors, to seek out strong performing active funds. We also regularly review passive investment approaches and look to select the right approach for each sector and asset. Speak to one of our experienced financial planners if you would like to review an existing portfolio, or invest funds using a blend of cost effective passive funds and attractive actively managed funds.

If you would like to discuss the above further then speak to one of our advisers here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Receipt reading Capital Gains Tax

Making use of the Capital Gains Tax allowance

By | Tax Planning

Tax efficiency is an important part of any sensible financial plan, and by using the annual Individual Savings Account (ISA) allowance, or saving into a tax advantaged plan such as a personal pension, investments can be left to grow over time without undue tax considerations. Where investments are held outside of a tax advantaged wrapper, making use of allowances on an annual basis, by reviewing an investment portfolio regularly and considering appropriate changes to the way the portfolio is structured, can give the best chance of avoiding a tax headache later.

We often come across historic investments that have been held for many years outside of an tax wrapper, such as an ISA. As many of these holdings have been in situ for a long period, they often show significant gains over the original purchase price. As a result, selling these assets could generate a liability to Capital Gains Tax (CGT).

CGT is a tax that could be charged on the profits made when selling, transferring or gifting assets, including shares and other collective investments, property that is not your main residence, or personal possessions worth £6,000 or more. Certain assets with limited lifespan and personal motor vehicles are exempt from CGT, unless they have been used for business purposes.

When CGT is charged, higher-rate taxpayers currently pay CGT at 20% on gains from investments and at 28% on gains from residential property. For basic-rate taxpayers, these rates may be reduced to 10% and 18%, respectively.


Use it or lose it

Every individual receives an annual CGT exemption which enables tax-free gains to be made. In the current Tax Year, the allowance for individuals is £12,300. The allowance is provided on a use it, or lose it, basis. It can’t be carried forward into the next tax year, so it makes sense to use the tax-free allowance each year, which could reduce the risk of incurring a significant CGT liability in the future.

This can be particularly helpful for assets such as shares and investments, that carry large gains. A proportion of the investment can be sold to make use of the allowance, and by consistent use of the allowance on an annual basis, larger positions can be reduced over a period of time.

Of course, when it comes to investments, the decision to sell assets is more complex than simply looking at the tax considerations. For example, the underlying market conditions could mean that selling an asset to crystallise a gain is made at a time when investment values are lower. Conversely, the prospects for an investment may be positive and selling to use the CGT allowance could limit future gains. This is why it is important to consider the bigger picture and take advice before reaching a decision.


Carry forward the losses

When multiple transactions are carried out in the same Tax Year, the gains and losses are offset against each other to reach a total gain for the Tax Year. For example, making a gain on an asset of £10,000 and a loss on another asset of £2,000 would lead to a net gain of £8,000. However, if the net result of the combined transactions shows a loss, this loss can be carried forward to be used against gains made in excess of the annual allowance in future Tax Years. To make use of loss relief, H M Revenue & Customs need to be informed that a loss was made within four years of the end of the Tax Year in which the asset creating the loss was sold.


Double up the allowance

Whilst the CGT allowance is individual, assets held jointly can make use of two annual allowances, meaning a combined annual allowance of up to £24,600 could be available. This can be particularly helpful when assets that cannot easily be divided or partially sold over time, for example an investment property, are sold.

Married couples can also make use of the exemption that applies to assets gifted between spouses. Such transfers are exempt, and as a result, one spouse can transfer assets to another to make use of an unused annual exemption.


Bed & ISA

One of the most useful methods of using the annual CGT allowance is to sell down assets that carry uncrystallised investment gains, and repurchase the same, or similar assets, within an ISA. As the ISA is tax-exempt, all future growth will be tax free. This transaction is known as a Bed & ISA, as assets need to be sold one day, creating the capital gain and then purchased on a following day. It is important to remember that this transaction will lead to a short period of time when funds are not invested, which could work to your advantage or disadvantage.


The future of CGT

Outside of the annual allowance and other measures to potentially reduce a CGT bill, it is important to point out that the rate that CGT is charged is relatively low – particularly for non-property transactions – compared to other rates of tax. That being said, according to data from H M Revenue & Customs, the Treasury took in £14.2bn of receipts from CGT in the 2020/2021 tax year, an increase of 42% over the previous year.

Looking ahead, reform of the CGT rules appears quite likely over coming years. Given any future Government may be looking to increase the overall tax take, making changes to CGT could yield additional revenue without potentially being seen as making a politically unpopular decision, when compared to, say, increasing Income Tax or National Insurance rates.

For this reason, it may be an appropriate time to consider long standing investment positions and take independent advice as to the best way to deal with those investments, both from the perspective of long term investment performance, and tax efficiency. If you hold assets that could be liable to CGT, speak to one of our experienced advisers for impartial advice and guidance.

If you would like to discuss the above further then speak to one of our advisers here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Graphic of a hand reaching out of the word tax with another hand passing a buoyancy aid to it - Tax treatment of pension withdrawals

Dealing with an emergency situation

By | Pensions

The pension freedom rules introduced in 2015 have been an undoubted success, allowing individuals to access their pensions in a far more flexible manner than ever before. However, drawing taxable income for the first time, or taking an ad-hoc single payment of income, from a plan held in Drawdown, can create a tax issue where H M Revenue & Customs deduct more Income Tax from the payment than is due, leading to a lower net payment than expected. For the unsuspecting pension holder, this can lead to complications, in particular if a net amount of funds withdrawn from a pension is needed for a specific purpose.


Holding the right Code

Unless the Pension provider holds an up to date Tax Code for the individual, the provider will need to tax the payment under a temporary Tax Code, which is known as an Emergency Tax Code. Under this Code, the amount being withdrawn is treated as if it will continue to be paid at the same amount each month, even if this is not the case. The provider will therefore apply 1/12th of the personal allowance (£12,570 in the current Tax Year) to the payment, and will assess the remaining payment against 1/12th of each of the income tax bands currently in force (i.e. Basic Rate at 20%, Higher Rate at 40% and Additional Rate at 45%).

For many this calculation will lead to an overpayment of Tax. Take the example of an individual who withdraws £20,000 from an uncrystallised pension as a lump sum. Their only other income is their State Pension of £12,570, which conveniently matches their Personal Allowance. The first £5,000 of the pension payment will be paid Tax Free (as this represents the 25% Tax Free Cash available on the amount crystallised) and the remainder of the payment should be taxed at Basic Rate Tax (i.e. 20%) which would lead to a total net payment after Tax of £17,000.

Instead of paying £3,000 in Income Tax, if the payment was taxed under an Emergency Tax Code, this could lead to a Tax charge of £5,025, resulting in a net payment after Income Tax of £14,975 – some £2,025 lower than if the correct amount of Income Tax had been deducted.


Doing the maths

It is important to point out that a refund of overpaid Tax is normally automatically paid at the end of the Tax Year. However, if you are seeking to withdraw a fixed amount from a Drawdown pension for a certain purpose, if Emergency Tax is applied then the net result could leave the withdrawal short of the amount required.

When considering a withdrawal from a pension, it is therefore important to consider the tax implications of how the payment is to be treated. You can contact the Pension provider in advance and check the Tax Code that the provider holds for you prior to making a decision to withdraw, although it is important to note that the provider has no discretion as to which Code to apply and must use the Code supplied by H M Revenue & Customs.

An alternative is to withdraw a smaller amount from the pension first, upon which the Emergency Tax Code is applied, and then withdraw the remainder of the required amount once H M Revenue & Customs have supplied a new correct Tax Code, which will be triggered by the smaller pension payment. Whilst this is a sensible step in theory, there will inevitably be a delay until the new Code is issued, which may not be practical if funds are needed in the near future.

If a payment has been made with Emergency Tax Code applying, it can be a good idea to claim funds back quickly following the payment. If the pension withdrawal is made in April or May, for example, not taking any action to reclaim the overpayment of Tax could lead to a wait of 11 months or more for a refund. Conversely, taking a pension withdrawal for the first time, or a lump sum, in March, would normally mean a refund of overpaid Tax would arrive in a matter of weeks.


Claiming a refund

Given the number of individuals falling into the Emergency Tax trap, H M Revenue & Customs have a rapid refund system, which aims to pay back the overpayment quickly once the correct form has been submitted. These forms are relatively simple to complete and whilst the forms are an additional step that requires action on the part of the taxpayer, this process does at least provide the opportunity to make a claim for the overpayment of Tax quickly.


Let us guide you through the process

The complexities of the Tax treatment of pension withdrawals is one of a number of reasons why sound independent advice can add value for those using a drawdown pension to help fund their retirement. The pension freedoms have provided greater flexibility but also increased the responsibility of individuals to manage their accumulated pension savings appropriately and to their best advantage for the long term.

At FAS, we can provide impartial advice to those considering retirement, or reaching retirement age, on the benefits and drawbacks of a Drawdown approach, and on other options such as annuities. For those already holding a pension in Drawdown, we can review the overall strategy and investment options with the aim of managing the withdrawals effectively throughout retirement.


If you would like to discuss your requirements further then speak to one of our advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.