While we welcome in principle the Government’s forthcoming pension changes, there are a number of traps waiting to catch out those who only see the headlines and are not aware of the full picture.
We are concerned that in the excitement of the new regime, customers will rush to the new world, without realising they would be financially better off using the continuing rules that will still be available after April 2015.
Many of the claims made about the future pension lump sum changes are somewhat exaggerated. For people who hold personal pension plans for many years there has been no compulsory requirement to buy an annuity. Likewise the concept of taking lump sums from your pension isn’t new. Again for many years we have helped customers take a Tax Free Lump Sum from their pension fund without needing to take an income or retire
The real trap for customers lies in the parts of the pension rules that haven’t changed, not the parts that have.
It was the case, before the changes and continuing after April 2015, that the first quarter of your pension fund (25%) will be paid Tax Free, but the remaining 75% or three quarters is subject to income tax at your marginal rate – this could be as much as 40% or 45% tax.
For many years we have helped customers just release the Tax Free element of their pension fund while keeping the taxable element invested until the customer needs or wants it and may be on a lower level of tax. This will still be possible after the changes, but we fear that many customers will not be aware of this and will give millions of pounds to the tax man when they didn’t need to.
The proposals are for people to be able to access their pension fund in the same way that a savings or bank account can be accessed.
In other words if a customer aged 55 or over requires a lump sum of £20,000 then they can simply take it straight from their pension fund. The sting in the tail is that the first £5,000 is tax free, but the remaining 75% (£15,000) is subject to tax. Even at 20% tax that is £3,000 tax that has been unnecessarily given to the Inland Revenue. It also means that the customer has only realised £17,000 and not the £20,000 they wanted. However if they used the traditional route, which will still be available, then they may not have needed to pay any tax at all.
If the customer above had a pension fund of £100,000, then we could pay them £20,000 tax free, and we would keep the rest of their pension invested until they need it. They would even have a further £5,000 tax free available at a later date if they wanted it. Of course once their withdrawals exceed 25% of their original fund value, then the customer will need to start paying tax, but until such time then the traditional route is a much better option. In this case the customer is £3,000 better off.
We want customers to take advantage of the new pension regime so that they can use their pension fund how it best suits them. However that doesn’t mean we think they should be giving millions of pounds of unpaid tax back to the Government. For many, they may find that the old pension rules are adequate, and working with a company like ourselves they may be able to achieve what they want without paying a single penny in tax.
If you want to take a lump sum or lump sums from your pension, then talk to Best Pension Annuity about your options, and get quotes that reflect your requirements. You can click here for instant quotes or call us on 020 33 55 4827 now !!