New rules came into force on 6th April this year giving freedom to access pension benefits from age 55.
Whilst these changes are to be welcomed we would strongly recommend that anybody contemplating taking benefits from a pension takes full advices from an IFA beforehand as there are many pitfalls to watch out for.
There is a misconception that most of the pension is paid out tax-free. The only element paid out tax-free is 25% of the fund value with any residual drawings being taxed as income. If the whole of the pension were to be taken in April then this would result in a hefty tax bill. The personal allowance for 2015/16 is £10,600 but this is for the whole of the tax year so the only tax free element of this in April, would be £833.33 – anything over this would be taxed.
Likewise, the amount of income which could be taken at the higher rate tax paid at 40%, is £31,785 for the year. This equates to just £2,648.75 for April. Therefore, any pension drawn in April over £3,482.08 would be liable to higher rate tax. Whilst this could be reclaimed on a tax return, this could take some time to recoup from HMRC.
As previously stated, it isn’t straight forward and rather than leave yourself with an unexpected tax bill, it would be better to seek out advice from an IFA or Accountant. AUTHOR: Tim Beck