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Things to consider on the eve of the new Pension Freedoms era


We are now just a couple of weeks away from possibly the most crucial fiscal year end for the pensions world.

We have previously talked about there being numerous welcome modifications, likewise there are a couple of traps and time bombs that might capture some customers out.

The essential thing to remember is that everybody who is in Drawdown now (even if you are not yet taking income / earnings) is in something called 'Capped Drawdown'. This does not imply that you cannot benefit from the new rules - far from it. For some individuals it could be the case that it would be much better to stick with your existing Capped Drawdown product.

This is most likely to be the case if you are still contributing in to your pension. Those individuals who are in capped drawdown can still contribute £40,000 per annum (including tax relief) into their pension. Those who begin their Drawdown after April and take an income; or pre-April consumers who break the income restriction guidelines, will have their maximum yearly contribution allowance capped at £10,000.

Consumers who unintentionally break the rules could lose some tax effectiveness in the future. Prior to taking any income from your pension, please talk to us.

Keep in mind any income you do take from your pension (after any Tax Free Lump Sum) is liable to income tax at your greatest rate, even if you take it as a single lump sum.

Single Contributions

With the brand-new pension freedoms making pension saving appealing once more, you might wish to consider making a single lump sum contribution. It will get immediate growth of 25 % (being 20 % tax relief) with more tax relief if you are a higher rate tax payer.

You will be able to take 25 % of this amount as a Tax Free Lump Sum whenever you desire. You can take the residual 75 % as you like in accordance with the brand-new pension policies. The time when you take it could be vital as you will pay tax on it, so you may want to wait until you are on a lower income and therefore paying a lower rate of tax.

Till then, although not guaranteed, ideally it will grow.

If you pass away before the age of 75 then whoever acquires it can take it all tax free!! If you pass away aged 75 or over, then whoever acquires it can either put it in a pension in their name without any tax deductions, or take it as a lump sum and pay tax at their marginal rate.

No matter how much is in your pension fund when you die, it will not form part of your estate for inheritance tax purposes.

Secure Capped Drawdown before April

If you have actually not taken any benefits from your pension fund (Tax Free Cash or Earnings) then you are still governed by personal pension guidelines. If you take an income from your pension fund after April your yearly contribution allowance would instantly be lowered to £10,000. If you crystallised just a little part of your pension before April, then you qualify for Capped Drawdown and can keep a £40,000 yearly contribution allowance if you stick within the income limits.

For some customers this could be a valuable benefit.

This webpage has gone over current subjects in a very basic format, if you would like more details on any aspect, please do not hesitate to contact us. You can call us direct on 020 33 55 4827


By Bob Cook
Published : 11th March 2015
Nothing in this article should be taken as personal advice and recommendation. UK tax rates and pension legislation are liable to change and concepts, rates, legislation and rules referred to may not be current at the time you read this article.


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