Could pension freedoms hit you with a tax bill?
Pensions experts are warning people to consider the tax implications of pension freedoms carefully, as one man narrowly avoided a £20,000 tax bill for taking his pension out as cash.
Mr James, a 64 year old from Redhill, planned to withdraw his £90,277 pension, and use it to replace his car and pay off his mortgage. Pension freedoms initially seemed to offer a simple solution, as he could access the entire pension pot, and do everything he needed with it. It was only on further investigation that he realised the price he would have paid in tax.
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His tax bill could have come to £20,000 – given that his pension withdrawal would have pushed him into the 40% tax bracket and dramatically increased the tax payable on his lump sum.
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Howard Hill, a spokesperson from Age Partnership – whose non-advised SelfSelect service, Mr James used - said: "In the end he opted for drawdown, and to invest his pension into a fund which he could make withdrawals from whenever he needed them." This allows him to make smaller withdrawals over a longer period of time, which gives him better control over his pension savings and hit tax bill.
Drawdown, however, is just one possible option, and because the money remains invested, the value can go up and down, so it won't suit everyone. There are plenty of solutions on offer, and Hill says the important thing is to take the time to find the right one for you.
In addition to income drawdown, there are other alternatives that retirees can consider. They may wish to buy an annuity, to turn their savings into a regular income. Alternatively, they can take small sums direct from their pension. If they prefer, they can mix and match the available options - using some of the pension to buy an annuity and taking some of it in lump sums. They could even leave the whole lot invested on retirement if they don't need the income.
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