PENSION FREEDOM AND RESPONSIBILITY

From the 6th of April the various new pension rules come into effect. They allow those with personal pensions from age 55 to take money out of their pension as much as they want, and when they want. The general rule still applies that only the first 25% of the fund can be taken tax-free. If more than that is drawn out, it will be taxed as if it were earned income in the Tax Year in which it is taken. You will still have the option to use your pension fund to secure a guaranteed income for life by purchasing an annuity or using a Drawdown Pension to keep your money invested with or without guarantees.  

This “pension freedom” approach has been in effect in Australia for many years and generally people have made sensible decisions with their pensions – with a minority taking it all out to splurge on a world cruise or buying a fancy car. With the freedom to access the money, comes a need to assess how you will use it. Pensions generally are intended to replace earned income as one grows older and works less, or gives up paid work all together. This means some forward planning will need to be done including working out how long you are likely to need to draw on the pension fund and what your budget is now, and what it will be in the future. This planning will be different from person to person.
 

The level of tax you will have to pay on the money you take out may well determine how much you take out and when. To repeat what we said before, the first 25% of the pension fund can be taken free of tax. The balance of any additional money taken out will be added to any other taxable income you have in the Tax Year and you will pay tax accordingly. If we look at the Tax Year beginning 6 April 2015, you have your Personal Allowance which means, for most of us, that the first £10,600 of income will not be taxed at all.The next £31,785 you earn will be taxed at 20%. After that you will pay tax at 40% for the next £107,615, and any income taken above that will be taxed at 45%.