The pension freedoms introduced by conservative chancellor George Osborn in 2015 mean that it is no longer mandatory to purchase an annuity at retirement and you can extract 100% of your pension fund in cash from the age of 55. This is very exciting news – but is it right for you? The problem with money (especially pension money) is that you can only spend it once but then…
…once it’s gone – it’s gone!
There has always been the option to remove up to 25% of a pension fund tax free with the balance being subject to income tax and that has not changed. But the question now is why take money out of a protected, tax free environment; one that properly established is outside your estate for IHT purposes (i.e. it’s in your pension drawdown account) and transfer it into your taxable bank account? If you have a plan for the 25% take it. But if it is now just part of your general funds it is now almost certainly better to leave the money in your pension until you need it. You can always take a total of 25% of the fund tax free at any time.
The new pension freedoms are referred to as “flexi access drawdown”. Under these new rules you can take as much as you like from a pension whenever you like – as long as the pension’s own rules allow. But there are some things to watch out for:
- 75% of the pension pot is still taxable on a top slicing basis. So if you take money out when you are still working or when you are in receipt of other taxable income, you may pay unnecessary higher rate tax on your pension…
- You may find that you have compromised your ability to claim certain state benefits in the future.
- Your maximum annual contribution to pension (annual allowance) drops from £40,000 to £4,000.
- Any existing pension may not allow flexi access drawdown so you may have to transfer to a plan that does
- Any existing plan may have guaranteed annuity rates which make staying put more attractive than you might have thought
- Any existing plan may levy significant exit charges making a transfer out quite expensive
Many providers will not allow you to access these new pension freedoms unless you have first taken appropriately qualified independent financial advice and you cannot normally transfer a pension without such advice in any event. Talis are expert in these new rules and we have already helped a significant number of people find the right option for them.
Used correctly the new pension freedoms are a huge financial planning opportunity. But as you can see the are some real traps for the unwary. This is one area where it really pays to take independent financial advice. Call the experts now.