Taking pension for first time? The stomach-sinking tax shock you should prepare for, writes Becky O'Connor

You may fear your fund value declining at precisely the wrong moment.

You may wonder whether you should start accessing it at all and just carry on working that bit longer.

What you are probably not expecting, the very first time you summon up the courage to make an income withdrawal, is for HMRC to tax you to the hilt, so that what you thought was a big enough withdrawal to get you through the next few months turns out to be just enough for your bus fare.

Something that sounds quite innocuous: the ‘month 1 tax code’ can actually be a stomach-sinking experience that can cause quite a bit of time and stress to resolve - when all you wanted to do was start accessing your pension.

What can happen is HMRC taxes you as if that withdrawal is something you are going to do every month, rather than, as is more likely, every three months or six months, for example.

If you are still earning a salary and start taking an income from your pension, this code could come as even more of a shock.

HMRC’s assumption is a bit daft, as in the case of someone accessing a pension, it’s unlikely their income would be as high on an ongoing basis as HMRC thinks it could be based on that one withdrawal. Nevertheless, it continues to levy emergency tax on new retirees, year in, year out, for want of a better and more efficient system.

Luckily, you will get this money back, even if you don’t have it quite when you wanted it.

By filling out a specific form, HMRC can adjust your tax code, so that when the next withdrawal is made, the right assumptions are factored in and you can get a refund on your overpaid tax.

You can also get a refund by filling out a self-assessment tax return.

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Sometimes, you can avoid the problem completely by giving your pension provider an up to date P45 so your tax code can be amended before you make the withdrawal, if they offer this option (which in turn depends on HMRC’s rules).

Or, it might be possible, with a good bit of forward planning, to take a much smaller amount as an initial withdrawal, triggering the emergency code on a nominal withdrawal, then, when you come to make your first proper withdrawal a few months later, you can do so with the correct tax code in place, so you aren’t out of pocket to quite the same degree.

However you manage it, the most important thing is to be aware of it - especially if you are planning to access your pension for the first time, soon.

You may think it’s a very annoying process to go through and wonder why there isn’t a simpler way that involves you chasing tax refunds, but until this system changes, I’m afraid it is yet another slight hurdle to jump on your path to a happy retirement.