The Pru won’t hand over my £20k

I am writing to you in March, and am still waiting for a form so that I can access my money. I am disappointed and frustrated by Prudential’s service and processes. I find it hard to believe that it can take six weeks for an administrator to put a form in the post. Even in the present difficult circumstances, this is not acceptable.

Would it be possible for you to raise this on my behalf?
Raymond Heasley, Nottingham

Troubleshooter says

You are not the first person to write to me this year after having problems with the Pru. It took the company three months to change the investment funds in one reader’s pension, and your simple request to access your money has been painfully difficult.

You sensibly wanted to withdraw £20,000 from your pension before the end of the 2020-21 tax year so that you wouldn’t have to pay a greater amount of tax on it were your income to exceed the threshold for the higher rate in the next tax year, which began on Tuesday this week.

As you know, when you withdraw money from your pension as small lump sums the first 25 per cent of each withdrawal is tax-free, and anything after that is taxed in the same way as income. You were expecting to get £5,000 tax-free, and for the remaining £15,000 to be taxed at the basic rate of 20 per cent, since you had used up the personal allowance on which you do not pay tax for that tax year. You understood that this would give you £17,000 from your £20,000 withdrawal.

If your total income, including withdrawals from your pension, exceeds £50,270 in a tax year (that amount having increased from £50,000 for 2021-22), you will be taxed at a rate of 40 per cent on amounts over the higher-rate threshold, and 45 per cent on amounts over the additional-rate threshold of £150,000. When we spoke it was about three weeks until the new tax year started on April 6, so I could see why you were worried that you wouldn’t get your money before the end of the last tax year.

I always find it shocking that in this digital world companies expect customers to fill in paper forms when such processes could be carried out far more efficiently online. When I contacted Prudential it (somewhat ironically) blamed technology for the sluggish way it had handled your query.

The company recently moved its customers on to a new IT system, which meant there has been a period of disruption for lots of customers, including the reader I wrote about last month. Prudential said: “We are sorry for the delay in sending Mr Heasley the necessary forms to complete the withdrawal from his pension. We have encountered some problems when implementing a new system designed to improve outcomes for our customers.”

Prudential then contacted you to say that it would take another four weeks for the money to be transferred. I agree that this was totally unacceptable given that you had waited two months and there was a risk that you wouldn’t get your payment until the new tax year began. I knew how concerned you were about the delay, so I contacted Prudential again, and it told me that it had prioritised your case.

Two days later, at the end of March, Prudential confirmed that the money had been transferred to your account. However, that wasn’t the end of the matter because rather than getting the £17,000 that you expected, you received £15,000. It turns out that while the first £5,000 had been tax-free, the remainder of the withdrawal had been taxed at an “emergency rate”, rather than the basic rate of 20 per cent.

This emergency rate is often applied to first withdrawals from a pension. The rate assumes that you will be taking the same amount of money from your pension every month. Of course, if you were to take £20,000 from your pot each month this would be equivalent to an annual income of £240,000, which is why some of your withdrawal was taxed at the higher and the additional rate. You are not planning to withdraw this much each month.

Overpayments of tax when you’ve taken a small lump sum from your pension can be reclaimed from HM Revenue & Customs. You phoned the tax office and were told that it will review your total income for the 2020-21 financial year and adjust your tax accordingly, so you should get a refund. Unfortunately, you may have to wait another month to receive the £2,000 that you overpaid.

You say that you felt fortunate that you didn’t need the full £17,000 immediately, because you face having waited four months since you made your original request for the money.

I am sorry that you have had to jump through so many hoops to get money that is rightly yours. While I am sure you would rather have had your money without such difficulty, on the plus side you will get £200 compensation from Prudential for the inconvenience caused.

The rules around stocks and shares Isas are gobbledegook to me

During the pandemic I decided to invest for the first time. I consider myself to be of average intelligence — nevertheless, I have read about stocks and shares Isas and cannot get my head around the concept. I understand that profits made by investments in Isas are not subject to capital gains tax but I had some questions I hoped you could answer.

First, can dividends earned from shares within the Isa be transferred out without incurring tax? And second, when a share is sold, must the profit be kept in the Isa? And for how long? Surely there must be a time limit.
Raymond Shamash, Borehamwood, Hertfordshire

Troubleshooter says

Isas are useful, particularly when it comes to investing, so it’s great that you want to understand how they work when taking profits.

An Isa shelters you from tax, including capital gains, as you have mentioned. You aren’t charged income tax when you withdraw money from the account, and you don’t pay tax on dividends from shares in your Isa.

If you were to invest in shares outside an Isa, your earnings would be subject to the dividend allowance — only the first £2,000 of dividends earned in a tax year would be tax-free. Beyond this threshold you would pay tax on your dividend payments at 7.5 per cent, 32.5 per cent or 38.1 per cent, depending on whether you are a basic-rate, higher-rate, or additional-rate taxpayer.

To answer your question about transferring dividends, yes, you can move them into your bank account without incurring a tax bill.

Dividend income earned from investments held in an Isa remains tax-free whether you choose to keep it within the Isa wrapper or withdraw it. However, Laith Khalaf from the investment platform AJ Bell advised that if you withdraw the dividends and then invest them outside the Isa wrapper, the return made on them could be subject to tax. The money no longer has special privileges once it is outside the tax shelter, so you may have to pay capital gains tax on profits you make, although everyone gets a fairly generous tax-free capital gains allowance of £12,300 each financial year. It is important to note that this is £12,300 of gains you cash in every year, rather than just profits you make on investments.

“If you don’t need the dividend payments for immediate spending, it’s probably best to leave them tucked up in the Isa until you do,” Khalaf said.

Reinvesting dividends within the Isa can be an effective way of building long-term tax-free returns. Buying more shares means that your savings could grow faster, and it is a way of contributing to your Isa without using more of your £20,000 annual investment allowance.

On your second question, rest assured that anything earned in an Isa can be taken out and put in your bank account (with the exception of Lifetime Isas and Junior Isas, which have restrictions).

Rebecca O’Connor from Interactive Investor, a trading platform, said: “The beauty of a stocks and shares Isa is that you can access the money whenever you want. The only time limit is the amount of time it takes to sell a holding and withdraw the cash to your nominated bank account.”

Your questions suggest that you’re keen to be able to access your money. O’Connor said that there is nothing to stop you withdrawing it but pointed out that you won’t benefit from future investment growth on anything you take out.

Remember that investing is for the long term. An Isa should provide you with a place to grow your wealth tax-free until you need it. With this in mind, it may make sense to keep your money in the account unless you want it for something specific.