HM Revenue and Customs officials have issued a stark warning today to individuals considering early access to their pension funds, cautioning they could face court proceedings for tax avoidance. Numerous people nearing retirement choose to withdraw portions of their accumulated savings.

However, HMRC has released an alert highlighting how individuals are being caught out – with withdrawals exceeding £30,000 potentially attracting the attention of the tax authorities. Should a payment be classified as unauthorised, the individual could face a punishing 55 per cent charge to HMRC.

In a post on X, they stated: “Thinking of dipping into your private pension pot early? It could be tax avoidance and could cost you a lot more than you think. Don’t get caught out.”

Official guidance explains: “The tax rules specify the conditions that need to be met for payments to be authorised. Any payment that does not meet these conditions is an unauthorised payment.”

Common examples of situations where payments are classed as unauthorised include:

  • trivial lump sums in excess of £30,000
  • continued payments of pension after the member’s death
  • when a scheme realises it incorrectly calculated the amount of the member’s pension pot following a transfer of funds or purchase of an annuity and the balancing payment is made directly to the member
  • most lump sum payments to cash-in or access pension funds before age 55 except when: The member retires due to ill health. If before 6 April 2006 the member had the right under the pension scheme to take their pension before age 55
  • Certain movements of pension funds within a pension scheme are also classed as unauthorised payments.

The guidance also warned that certain companies approach individuals offering help to access their funds – but cautioned these often breach HMRC rules: “Unscrupulous firms are using misleading information to promote personal loans or cash incentives and enticing savers to unlock their pension pots early. Very often these firms say there is a legal loophole they can use so you do not pay tax. There is no legal loophole and these transactions are unauthorised payments.”

Unauthorised payments are subject to the 3 tax charges. These are the:

  • unauthorised payments charge
  • unauthorised payments surcharge
  • scheme sanction charge

The HMRC said that people could end up paying 55 per cent of the sum they want to draw out. The rate of the unauthorised payments charge is 40%. The unauthorised payments surcharge is payable by the same person who is subject to the unauthorised payments charge. It’s usually due when:

  • a member gets unauthorised payments of 25% or more of their pension pot in a year
  • an employer gets unauthorised payments of 25% or more of the value of the pension scheme in a year

The rate of an unauthorised payments surcharge is 15%. This means with the unauthorised payments charge the total tax rate payable is 55%.

For more informaiton on pension schemes and unauthorised payments from HMRC click here.