Don't Get Caught By Pension Freedoms Tax

Don’t Get Caught By Pension Freedoms Tax
Kura Huraa Maldives by Julian Cohen. Why?

As The Treasury pockets far more than its pension freedoms tax prediction, raking in almost £1 billion in the first year, discover how to minimise your Income Tax bill as you cash out your pension fund

Industry Experts Express Concern That Some Savers Weren’t Fully Aware Of The Huge Amount Of Pension Freedoms Tax They'd Suffer In Pulling Out Their Pension Money In Big Chunks

HMRC Wins Big From Pension Freedoms Tax

There’s no doubt that under pension freedoms, having the right to draw out some or all of your pension fund has been popular with savers.  It’s also been extremely popular with The Treasury.

Pre-launch analysis indicated HMRC would collect about £700 million in pension freedoms tax in 2015-16, as savers over the age of 55 won the right to unfettered access to their pension funds.  But recent figures issued by the Office for Budget Responsibility suggests the pension freedoms tax generated has amounted to almost a third more than expected.

Once the full level of tax free cash has been withdrawn from your fund, HMRC treats any further money withdrawn as if it were an annual income, pushing some savers into a higher income tax bracket.  It can see up to 45 per cent of your withdrawal disappear overnight.

Whilst it can make sense for tiny funds to be withdrawn in one go, particularly if it doesn’t push you into a higher tax bracket, generally speaking, you could save pension freedoms tax if you spread your withdrawals over a number of years, as you can see from this article on Pension Freedoms Tax.

Pension Freedoms Tax On Annuities

In a possible extension to pension freedoms, currently being debated is the subject of whether people who have bought annuities should be able to trade them in for a cash lump sum. 

Ignoring the obvious issue that someone who’s in receipt of a guaranteed income for life could find themselves short of income later in retirement if they spend the cash value of their annuity, it’s highly likely the amount they’ll have to play with may be reduced significantly by pension freedoms tax. 

It’s a great principle that you should have control over your money.  But with that freedom comes the responsibility of understanding the short term tax implications, and the long term financial effect of grabbing hold of your cash to the detriment of your future income.  For it’s not just the fact HMRC is ready to pounce as you ‘cash out’, should you invest the proceeds outside of your ‘tax-free pension wrapper’, The Treasury will gladly relieve you of further tax wherever it can.

Pension Freedoms Tax Review

One year on, three industry experts were interviewed about pension freedoms tax and related subjects by FTAdviser’s Emma Ann Hughes.  They were:

  • Steve Webb, director of policy for Royal London (yes, the very same pensions minister who became famous for his pension freedoms Lamborghini quote)
  • Billy Burrows, director of Retirement Advantage
  • Ben Gaukrodger, manager of savings policy for the Association of British Insurers

Hit the blue 'Click Here' button on the image below to watch the interview.

pension freedoms tax

Pension Freedoms Tax Is Raising ‘LoadsAMoney’

Whilst the video above contains some valuable information on pension freedoms tax and what further changes might be coming your way, as it’s clearly raising far more than expected for The Treasury, here’s a light-hearted blast from the past that came to mind as I reflected on how well UK PLC has done out of this.  Enjoy!

Know Your Stuff To Minimise Your Pension Freedoms Tax

Unless you’re completely confident of all of the issues related to pension freedoms tax, it’s no bad thing to seek the advice of your trusted independent financial adviser. 

After all, you’ll have spent a working lifetime building a fund of money to keep you in the lap of luxury when you stop work.  So it pays to think twice before you rush to chuck away up to almost half your life’s work, just because you can!

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