Taxpayers who are looking to reorganise their finances to respond to the impact of coronavirus on jobs are being warned to think carefully about the tax and welfare benefit consequences of drawing on savings
The Low Incomes Tax Reform Group (LITRG) cautions that some people who are under significant financial pressure may need to consider accessing pensions in order to stay afloat, but risk making their financial position more difficult than it need be.
Victoria Todd, head of the Low Incomes Tax Reform Group, said: ‘Common mistakes we have seen, even without the pressure of the current situation, include those aged 55 and over taking lump sums from their pensions while still being responsible for children and triggering a high income child benefit charge.
‘Tax credits claimants might also see unwittingly a reduction in their award from such actions – not only for the tax year in which the payment is taken, but also in the following year.’
Todd also cautioned that welfare benefits might also be impacted - for example, untouched pension savings may be ignored in means-tested benefits calculations, whereas pension funds that have been withdrawn could be assessed as income or capital, depending on how the individual takes them.
There are also long-term considerations to be weighed up when making withdrawals from ISAs and other savings vehicles.
‘The current situation might lead to people acting hastily but the timing of decisions is often crucial. While we understand these are extremely challenging times, and it is important to remember that tax and benefits impacts are not the only considerations to be taken into account, our key message is to try to think of all the consequences before you act,’ Todd said.
LITRG guidance on pension withdrawal
LITRG guidance on savings withdrawal