PERSONAL FINANCE Personal finance
judging by reports from pension companies, many thousands of people have already been taking advantage of these new freedoms. Great news! I do, however, have some concerns that some retirees
S
who, when opting for flexible access to their funds rather than a traditional annuity, will misjudge investment returns or their own longevity and risk running out of money. Specialist advice in this area really is essential. There have also been numerous articles in both the local and national press, highlighting the new opportunity to use your existing pensions to fund alternative investments. These might include starting a business or purchasing a buy to let property, for example. In practice, the tax consequences of making a large
withdrawal from your pension fund may make some of these ideas unattractive. Above an initial 25% of the pension fund that can generally be withdrawn tax free, further payments will be taxed at your marginal rate of income tax. This means that for higher and additional rate taxpayers, achieving a further £1 of income above the 25% tax free payment (plus the £10,600 that falls within your Personal Allowance) can prove extremely expensive. The table below summarises the total withdrawal
Marginal Rate of Tax
Basic Rate Band - 20%
Higher Rate Band - 40%
Higher Rate Band - 60%*
Higher Rate Band - 40%
Additional
Rate Band - 45%
£1.82 £1 82p £150,001+
* The effective rate of tax is 60% for income between £100,000 and £121,200 due to the tapered withdrawal of the Personal Allowance.
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
Gross Withdrawal £1.25 £1.67 £2.50 £1.67 Net Payment £1 £1 £1 £1
ince April this year, it has been possible to withdraw funds from your pension much more flexibly and
by Ian Thomas Pilot FINANCIAL PLANNING.
PeNsION INCOMe: NeW FReeDOMs, BuT ReAD THe sMALL PRINT
from pension funds that must be made to achieve an additional £1 payment, net of tax. But the immediate position, when you receive the
payment, could actually be worse due to the way the tax system operates in relation to ‘one-off payments’. Unless you have a P45 from a previous source of
income or employment that you received in the tax year in which you received the pension payment, then the pension company needs to use an ‘Emergency’ tax code. This means that they have to assume that the amount of your withdrawal will be received for every month of the tax year. As a result, the rate deducted could easily be at 40% or even 45%, even if the amount of tax you should actually pay may well only be 20%. You can, of course, claim back any excess tax,
but how and when you do this will depend on the circumstances. In some cases you will have to wait until the end of the tax year and use the self- assessment system. Finally, it’s worth noting that once you have taken
more than just the 25% tax free cash from your pension fund you will need to tell the providers of any other pension funds to which you are contributing, as your annual tax efficient contribution allowance will then fall from £40,000 to £10,000.
Income Tax Paid
25p 67p £1.50 67p
Income Bands (After Personal Allowance of £10,600)
£0 - £31,785 £31,786 - £100,000 £100,001 - £121,200 £121,201 - £150,000
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102 |
Page 103 |
Page 104 |
Page 105 |
Page 106 |
Page 107 |
Page 108 |
Page 109 |
Page 110 |
Page 111 |
Page 112 |
Page 113 |
Page 114 |
Page 115 |
Page 116 |
Page 117 |
Page 118 |
Page 119 |
Page 120 |
Page 121 |
Page 122 |
Page 123 |
Page 124 |
Page 125 |
Page 126 |
Page 127 |
Page 128 |
Page 129 |
Page 130 |
Page 131 |
Page 132 |
Page 133 |
Page 134 |
Page 135 |
Page 136 |
Page 137 |
Page 138 |
Page 139 |
Page 140 |
Page 141 |
Page 142 |
Page 143 |
Page 144 |
Page 145 |
Page 146 |
Page 147 |
Page 148 |
Page 149 |
Page 150 |
Page 151 |
Page 152 |
Page 153 |
Page 154 |
Page 155 |
Page 156 |
Page 157 |
Page 158 |
Page 159 |
Page 160 |
Page 161 |
Page 162 |
Page 163 |
Page 164