The Budget announced unprecedented flexibility and choice in how people can use their pension savings in the future. From 6 April 2015, people over 55 can choose to withdraw their pension savings as they wish, although this will be subject to their marginal rate of income tax in that year.
A large part of an individual's pension fund could be payable in tax if they withdraw large sums in one tax year. Even people who have been used to paying basic rate tax their whole life could find themselves paying 40% tax on part of their fund.
33% tax (£11,867) could be paid on complete cash withdrawal from the average pension pot[1]
New research shows 59% of the over 55s do not understand the tax implications of lump sum withdrawals[2]
This comes as new research shows there is a lack of understanding around the implications of taking the whole pension pot as cash, with 59% of people aged over 55 saying they do not understand the tax implications of such a move. The research also shows that when the tax implications are explained, people are far more likely (83%) to leave their money in a pension wrapper and draw an income as needed, rather than taking the entire pot as cash in one go. 17% say they are happy to pay tax on any withdrawal.
Assuming an average pre-retirement salary of £30,000 and average annuity pot of £35,600, someone would pay around 33% tax (£11,867) if they choose to withdraw their entire pension in the same tax year they were earning.
Although it is anticipated that the new pensions reforms will come into force from the next financial year, discussions are still at the consultation stage. The new freedoms proposed by the Chancellor could result in some sizeable tax bills for those wanting to access their entire pension savings in one go. While increased flexibility is good, there is a minefield to navigate.
Source:
[1] ABI, the average annuity purchase price in 2013 was £35,600, after tax-free cash has been taken. These figures have been calculated using income tax limits for 2014/15 as follows: individual personal allowance £10,000, basic rate limit £31,865, higher rate payable £41,865 (figures assume person born after 5 April 1948).
[2] Research carried out online among 1,000 respondents aged 45?65 by Onepoll, all of whom are paying into a pension. 299 people were aged 56?65. Fieldwork was completed 23?27 May 2014.
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.
