Do you like surprises?
Nobody likes an unexpected bill.
Especially if it’s going to cost you thousands.
It’s a lot better to be at the receiving end of an unexpected payment, isn’t it?
That’s what’s been happening to the government, which vastly underestimated how much tax it was going to earn from people cashing their pension in early, using pension freedoms.
In 2016/17, it expected to earn £600 million a year in tax this way.
Can you guess how much money HMRC actually earned?
According to a report released by the Organisation for Economic Co-operation and Development (OECD) in December, the answer was £1.1 billion in 2016/17. – nearly twice what it had planned for!
And the Office for Budget Responsibility estimates this will rise to £1.3bn in 2018/19.
Why is this happening? And what does this mean for you, as an employer?
The answer to the former is a little shocking.
The OECD’s report, which is entitled OECD Pensions Outlook 2018, stated that people "may not understand the consequences in terms of taxes paid of withdrawing funds from their pension account."
In other words, they just don’t understand the tax law.
They assume that the money in their pension fund is theirs, tax-free.
So when they hit 55 and are suddenly able to access the money in their pot, it is very tempting to dip into it – perhaps to pay off part of their mortgage, give some money to their children or pay for a well-needed holiday.
They might treat that money a little like the cash in their bank account.
What they don’t realise is that while they won’t pay any tax on the first 25%, the remaining 75% is added to their income for the year, and taxed at their income tax rate.
Not only are they paying tax on most of the cash, they could even be pushed up a tax bracket.
Depending on how much they’ve withdrawn, the result of this unexpected tax bill can be disastrous.
It can wipe out a large part of their pension pot.
Instead of looking forward to a comfortable retirement, they have to start rethinking when they’ll be able to retire… if at all.
So close to retirement age, it might be difficult to earn more or cut back so they can build their pension fund back up again.
You can imagine how distressing this is...
…how much time they’ll have to spend, trying to sort out the mess….
…how resentful and angry they might become when they have to continue working well beyond the age at which they imagined retiring…
…and the impact that might have on your workplace.
The decision to withdraw that money, which they may have taken lightly, might impact the rest of their life.
If your employees fully understood these implications, would they make the same decision to dip into their pension pot before retiring?
I believe most wouldn’t.
The right advice is crucial
This is why everyone – your colleagues, your staff and yes, you too – needs access to sound financial advice in the run-up to retirement.
It’s for their own protection.
Most people are not financial experts and cannot be expected to know the ins and outs of our tax law.
That’s where we can help.
We have a series of options to help your employees make sensible decisions about their money in the runup to retirement.
This includes group workshops for people close to retirement age, where we run them through some of the basics, including the relevant tax law…
...a hotline for your employees to call, so you can refer them to our consultants if they come to you with pensions questions…
...and lots of helpful comms material you can send out, which can get people over 55 thinking about their financial choices.
For your company, these are all small, easy-to-implement measures. But for your staff, they can prevent big heartache.
P.S Here's another great resource for your employees!
We have recently launched FocusHub – a library of easy-to-understand eBooks and videos about pensions, tax, investment and basic financial principles. It’s meant for people who are not financial experts, who want help making good financial decisions.
Click here to take a look (and share the link with your employees too!).