Is removing your whole fund the right thing to do?
One of the big announcements in the March Budget was the ability for people to remove their entire pension fund as one lump sum. From April 2015, anyone over the age of 55 in a qualifying scheme will, for the first time, have full access to their pension, regardless of how much money is in it. Previously, a person could only access their 25% tax-free cash at 55 (and anything over that is taxed at 55%), or from 60 could remove a fund smaller than £18,000 in one lump sum in a process known as trivial commutation.
As the new rules provide so much flexibility, the government will apply tax rates to prevent the fund being spent recklessly. Withdrawals are taxed at the holder's marginal rate, so a basic rate taxpayer will pay 20% tax if they do not remove enough to push them into the higher bracket. When someone removes the entire fund, though, they could pay the 45% additional rate. This should act as a deterrent to prevent people removing their entire fund just to spend it, especially with the more recent news that pension funds can be accessed whenever people want to remove money from them.
With the prospect of losing nearly half of the fund, it could be expected that only people with definite plans for the money will remove the whole lot - such as to start a business, invest elsewhere or purchase buy-to-let properties.
Yet according to a new survey, an estimated 200,000 people intend to take their whole pension fund. Although this is just 12% of the people who will have the option, it represents a possible £1.6 trillion boost to the government in tax.
However, a large number of the respondents were unaware of the tax implications: "Of those who plan to take the cash, only 38 per cent of people knew how much tax would be paid on medium-sized pension pots, while just 6 per cent could say how much a large pot would lose to tax."
It's possible that once people realise how much they will lose in tax they will reconsider withdrawing the entire fund. It seems unlikely that the 21% of respondents who plan on taking a holiday with their pension fund will actually do so once they realise they could pay a significant amount of tax.
This highlights the importance of professional advice; making a hasty decision can have serious consequences on your finances, whereas an adviser will be able to explain the options and the pros and cons of each, helping you avoid a disaster.
Removing the entire fund may be the appropriate decision for some people, but for others it will not be - especially if it's just to be used for leisure. The government has made announcements of free guidance, which combined with the range of new options should reinforce the need for people to talk to advisers, but at the moment there is no legal requirement to do so for all of the options, which puts the responsibility with the consumer.
Do you intend to take your whole pot, and what would you do with it? Let us know in the comments.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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