[02.04.15]

The changes to pensions announced last year have been heralded as a major revolution, liberating the over-55’s from the shackles of annuities and giving them control over their hard- earned life savings.

What sometimes get lost in the small print is the tax implications of exercising the new freedoms. According to one report the Government estimates that they will raise nearly £3bn extra in tax from the reforms. Why? Because whilst 25% of any withdrawal will be tax-free, the rest is taxed as income at the individual’s marginal rate, which for many people will be 40%.

With an ageing population in the UK, pensions are obviously quite high on the Government’s agenda. To date, the approach adopted has been two-fold;
one to “encourage” people to save for their retirement,

the second to give people more control over their hard-earned savings.

The debate as to the effectiveness of the new measures or, indeed, whether one actually contradicts the other will, I suspect, still be ongoing long after most of us have retired.

The first announcement was auto enrolment – an attempt to make sure that all employed people belong to a workplace pension scheme, to which they and their employer must contribute.

The process of enrolment is taking place over a few years and by now most employers should be aware of their deadline “staging date”. There is more detail on this in our Castletons blog of 13^th October 2014.

The second part of the strategy was announced with a fanfare of publicity in March last year. In a nutshell, the changes mean that over 55s who have saved into a personal or “defined contribution” scheme are no longer required to buy an annuity but can withdraw their entire pension savings and spend it as they choose. To really underline this, the pensions minister said on TV that pensioners could blow their entire pension savings “on a Lamborghini” if they so wished. The changes are effective from April this year, so are we about to see the roads clogged up with luxury cars?

What the Pensions Minister neglected to mention was that the Lamborghini would have to be paid for after tax. Someone with a £280,000 pension pot and no other income would have to find an additional £80,000 to buy a car costing  that amount, once tax is taken into account.

Even a basic rate tax payer, who is still working, but withdraws an average pension pot of £30,000, would pay tax on £22,500. This could take them  into the 40% band depending on their other income and allowances.

The fact remains that used properly pension funds can be a tax efficient savings vehicle, but as with most things in life, timing is crucial and a little planning can make a huge difference.

Whilst we are not authorised to give pensions advice, we can help you look at the tax implications of the new rules. If you are considering setting up a new pension, contributing to an existing one  or withdrawing money from your pension and would like assistance with tax planning please contact Jackie or Andrew on 01625 524 127

For further information on the new pension rules the Government has introduced a new service at www.pensionwise.gov.uk

Castletons Accountants