WHAT COULD THEY MEAN TO YOU?
by Paul Pelopida (Dip)PFS – Director Portfolio Financial Consultancy Ltd
Accessing your pension safely, without unnecessary costs and a potential tax bill
With the biggest pension reforms in a lifetime now in place, are you ready for how these reforms could potentially affect you, whether now or in the future? The wide media coverage that followed the 2014 Budget announcements talked of pensions in the future being used as bank accounts and new pension freedoms leading to long waiting lists for Lamborghinis !
The changes to the pension tax rules were initially announced in the 2014 Budget and subsequently confirmed in the Taxation of Pensions Bill published on 14 October 2014, taking effect from 6 April 2015, which some have called ‘Pension Freedom Day’.
However, according to research, many adults aged 50 to 65 are indifferent to the pension reforms, or are confused about what it all means and how the changes could affect them. If you’re aged 55 or over from 6 April 2015, you should immediately be able to take advantage of this increased flexibility, but obtaining professional advice is essential to make sure you get an informed analysis of your particular situation.
TAX-FREE CASH FROM YOUR PENSION ON RETIREMENT
From 6 April 2015 there will be the option to withdraw up to 25% of the fund as tax-free cash from your pension on retirement or at any time from age 55 whether retired or not. This can either be taken all at once or you could make a series of withdrawals and have a portion of it paid tax-free.
In this instance, someone with a pension worth £100,000 could withdraw £25,000 cash tax-free in one lump sum and have subsequent withdrawals taxed as income, or alternatively make a series of withdrawals over time and received 25% of each withdrawal tax-free.
Although this would enable the person to manage their tax liability, it is not available if they use their pension fund to purchase an annuity.
WITHDRAWING YOUR PENSION
If you are aged 55 and over from 6 April 2015 you’ll have the freedom to decide how you choose to withdraw your pension, in excess of any tax-free cash. The choices will be to take the entire fund as cash in one single go, withdrawing differing lump sum amounts when you choose or taking a regular income utilising income drawdown where you are able to withdraw directly from your pension fund. The last two options would mean that your pension remains invested. Alternatively, you could purchase an annuity to secure an income for the rest of your life.
If you withdraw your pension in stages rather than all at the same time, any withdrawals in excess of the tax-free amount will be taxed as income at your marginal rate.
MAXIMUM VALUE OF PENSION SAVINGS
The Annual Allowance is the maximum value of pension contributions on which you receive tax relief each year. Your pension contributions after 6 April 2015 will still be subject to this and other specific contribution rules. Contributions to money purchase pension savings could also be restricted to £10,000 if you make any withdrawals from a money purchase pension in addition to any tax-free cash after 6 April 2015 via the flexi access drawdown route.
In the event that you have already entered flexible drawdown before 6 April 2015 you will also be able to make contributions of up to £10,000 a year, something not previously allowed.
If you were to have a pension worth £10,000 or less and took it as a ‘small pot’, the reduced £10,000 annual allowance will not apply. You could take pensions as small pots up to three times from personal pensions and unlimited times from occupational ones.
FROM 6 APRIL 2015 THE CURRENT 55% TAX CHARGE ON LUMP SUMS PAID FROM YOUR PENSION FUNDS IF YOU DIE BEFORE AGE 75 WILL BE ABOLISHED
BENEFICIARY PENSION PAYMENTS
From 6 April 2015 the current 55% tax charge on lump sums paid from your pension funds if you die before age 75 was abolished. The tax rules were also changed to allow joint life annuities to be paid to any beneficiary.
If you die after age 75, your beneficiaries have the options of taking the entire pension fund as cash in one go, subject to 45% tax, or receive a regular income through income drawdown or an annuity. This income will be subject to Income Tax at their marginal rate and if they receive periodical lump sums through income drawdown, these will be treated as income, so subject to Income Tax at their marginal rate.
MAKING UNLIMITED WITHDRAWALS
Anyone with a Defined Benefit (DB) pension, such as a final salary pension, will be able to make unlimited withdrawals. But in order to do so they will have to transfer to a money purchase pension such as a Self-Invested Personal Pension (SIPP).
As you could lose very valuable benefits this is rarely a suitable course of action and you will be required to receive professional financial advice first. It will also no longer be possible to transfer from most public sector pension schemes.
ACCESS YOUR PENSION SAFELY, WITHOUT UNNECESSARY COSTS AND A POTENTIAL TAX BILL
The pension reforms will bring about a new level of flexibility and choice. For some, an annuity may still be the right option. Others may want to withdraw their entire tax-free lump sum and convert the rest to income drawdown. It’s essential to obtain the right professional financial advice to ensure that you access your pension safely, without unnecessary costs and a potential tax bill. To discuss your situation, don’t leave it to chance. Please contact us at Portfolio Financial Consultancy Ltd.
Information is based on our current understanding of taxation legislation and regulations, any levels and bases of and reliefs from, taxation are subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.[divide style=”dashs” icon=”square” color=”#80aa43″]
Portfolio Financial Consultation Ltd
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Panteg Way, New Inn, Pontypool,
Tel. 01495 762763