Among many of the pension changes announced by the Government, and intended to come into force in April 2015, is the ability to use your private pension like a bank account. In other words if you have a need for say £15,000, then you could go to your existing pension provider and ask them to take this amount from your pension fund and pay it to you – assuming they are willing to provide the service.
Sounds good ? !! Well possibly – but it will definitely be good for the Government who stand to gain a tax windfall from the transaction. As we will soon explain, based on the scenario above, it is likely that from the £15,000 you requested, you will only receive £12,750, with £2,250 going to Her Majesty’s Revenue and Customs (HMRC). This is just one of the hidden tax bombshells in the new pension legislation.
What many customers may not know is that it could very well be possible to receive the full £15,000 without paying a penny in tax. This is something we have been helping customers achieve for many years.
It is likely to be more tax efficient for many customers to transfer to, and take advantage of flexi-access-drawdown than to stick with their more rigid pension policy where part of every withdrawal is liable to at least a 20% tax charge. This is due to what we call the Golden Rule of pension planning, which should be at the front of every customer’s mind when they are making decisions on their pension.
Despite the many changes announced to the use of pensions, the one thing that hasn’t changed is how the money you take is taxed. In virtually every instance, you can take the first 25% of your pension fund tax free, but the remaining 75% is subject to income tax – even if you take it all as a lump sum. Anything you take from the remaining 75% of your pension fund is added to any other income you take and taxed at your ‘marginal’ rate. If you are a basic rate tax payer you will pay 20% tax on the sum, however if when added to other income the sum taken pushes you into a higher tax band you could end up paying 40% or even 45% on all or part of it.
The problem is that when you ask your personal pension provider to pay you a lump sum they will pay you the first quarter tax free, but the remaining three quarters will be subject to income tax.
Well guess what ? You can !! In fact it has been available to customers for many years – many of the customers on our books have done exactly that. For a quote and more information click here.
Income Drawdown (and flexi-access-drawdown from April 2015) are very flexible pension policies that allows you to do many things. It combines the features of a pension savings plan whilst allowing you to take benefits in the form of a tax free lump sum and or an income.
One of the additional benefits of Drawdown is that you can just take the tax free cash only (or part of it), and leave the remaining taxable 75% until later, when you may be paying a lower rate of tax.
To take advantage of this approach, customers who currently have private pensions need to switch to a Drawdown contract. That is exactly what we do. Click here for a free quote and information pack.
Once a customer’s fund is in drawdown, we can then help them take lump sums from their fund as efficiently as possible - certainly making sure they don’t give money to HMRC when they don’t need to. Of course there may come a time when the customer has used up all their tax free entitlement and any further lump sums will be subject to tax, but at least they have delayed paying unnecessary tax before they had to.
To understand this situation better, let’s revisit the example discussed earlier in this article. We will assume that the customer has at least £60,000 in their pension fund and that they are aged 55 or over. The table below shows the difference between the customer taking a lump sum from their existing personal pension fund, or transferring their fund to Income Drawdown before taking a lump sum.