A few weeks ago, the budget left many people surprised at the extent of pension reforms. The newspapers were full of impact headlines suggesting everyone would rush out, blow their pension funds on an Italian supercar and then live off the state!
In very simple terms, from next year anyone with a pension could release the entire fund in one go, but this has implications for most, which means a need to understand this and plan accordingly. In many cases the first 25% of the accrued pension value can be taken as a lump sum; tax free. Under the new rules the balance of the fund can also be released as a lump sum, but subject to income tax as any pension income is.
So will people get their pension statement and then start requesting car brochures! My experience as a financial planner suggests this will not happen. I have never had a client, no matter what their wealth or financial position that has saved for retirement, reached that milestone and then blown the lot! Of course with a pension it was not usually possible to take such action as the available lump sum was only part of the pension fund value. However many people have also saved for retirement via ISA’s and other investments over the years and those funds are still very much intact and now generating an income. People save for retirement knowing at some stage they will stop earning a salary or income. With this in mind, part of what I do is to help people to plan.
- To ask them when they want to retire
- calculate how much income they will require
- calculate what they need to save to make sure that they achieve their objectives and then
- to make sure the income in retirement does not run out.
So is it realistic that someone with a pension plan of £100,000 for example will release £25,000 as a tax free cash sum and then elect to have £75,000 paid to them so they can go and buy the car of their dreams? Well if they did, the £75,000 would instantly make them a 40% tax payer resulting in them owing the tax man in the order of £19,500 in Income tax.
However that does not mean the changes to pensions are unnecessary; far from it, all I am saying is the headlines need to be put in context (nothing new there then!)
What it does allow is greater flexibility for those people who may have other sources of income and also maybe for those whose pension funds are very small and the annuity option is restrictive. As in all cases your personal circumstances will dictate what is the best option and I recommend you seek advice. Control of income is important but so is the control of tax, so rash decisions can often be the most costly.
Author: Phil James, Grosvenor Consultancy Ltd
There are advantages and disadvantages to using all of these strategies and they depend on individual circumstances so don’t take action without seeking competent advice. Tax rules, rates and allowances are all subject to change. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.
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