Why They Want You To Have Your Pension Fund

Why They Want You To Have Your Pension Fund
Galapagos by Julian Cohen. Why?

Despite increased flexibility for your pension fund from April 2015, there’s even more flexibility proposed, so what's really going on behind the Treasury’s acts of apparent generosity?

The Government Is To Create A New Pension Withdrawal Option

Believe It Or Not, Yet Another Pension Fund Change Is Mooted

Hot on the heels of last week’s article entitled Pension Change Slashes Tax Relief, it seems the Government is at it again.

Having introduced the fact you can withdraw your whole pension fund from 2015, subject to paying Income Tax at your marginal rate, and being at least age 55, it seems the Government believes this doesn’t go far enough.

In order to access your pension fund, you have to ‘retire’.  And that means either buying an annuity or going into drawdown.  That, apparently, isn’t flexible enough.

In the draft Taxation of Pensions Bill, it’s proposed that pension schemes will be able to pay ad hoc sums from a member’s pension fund, without the member having to buy an annuity or move into drawdown.

25 per cent of the money taken will be tax free.  The rest will be liable to Income Tax.  It’s going to be given the wonderfully descriptive title of “Uncrystallised Funds Pension Lump Sum”.

So what’s behind all this pension fund generosity?

The Treasury Is Expected To Net A Whopping £3.6 billon

The government predicts that from April 2015, 130,000 people each year will take advantage of the new pension fund flexibilities announced in this year’s Budget. 

Its calculations suggest it’ll raise £3.6 billion over the next five years, as pension fund holders incur significant Income Tax bills on taking their pension benefits.

Costing notes from the Treasury read: “This measure results in increased income tax receipts in each year until 2030. After that, a small reduction in tax receipts
 of around £300m a year is expected in steady state. This is small in comparison to the impact of all the Government changes on pensions, designed to ensure pensions provision is sustainable with an ageing population."

Currently, it claims around 5,000 people each year use pension flexibility.  This figure is expected to skyrocket to 130,000, based on the assumption that 30 per cent of an eligible population of 400,000 make use of the new pension fund rules.

It Often Pays To Consider The Contrary View

George Osborne is keen we should each be in control of our own money. He’s certainly onto a political winner with that one, for it’s clearly a natural instinct to want to be in charge of your own money.  But he’s no fool. 

Before you rush out blindly to get your hands on your pension fund, be warned it’s likely to cost you dearly in increased Income Tax.  And it doesn’t end there.

If you re-invest the net proceeds of your pension fund, chances are you’ll bump into further taxes on income you earn and profits you generate. And when you die, there could be Inheritance Tax to pay.  All that extra tax will make the Chancellor very happy indeed.  The net benefit to the Treasury could be colossal.

By contrast, if you leave your money invested within the tax wrapper that is your pension fund, your cash will accumulate pretty much tax free.

We’re always taught to bear in mind that when ‘something appears to be too good to be true’, we should be cautious.  So as the Government appears to be positively encouraging you to get hold of your pension fund with almost no restrictions, think twice:

  • 1. Work out what you want to do with your pension fund once you get your hands on it.
  • 2. Check your tax position before you raid your pension fund and after you’ve re-invested the proceeds.

If it makes sense to withdraw some or even all of your pension fund, raise a glass of champagne to George Osborne for changing the rules. 

If it doesn’t make sense, chances are in years to come, you’ll be very pleased you gave it some detailed thought now, concluding the money in your pension fund is best left where it is.  At least for now, until, perhaps, they fiddle with the rules again!

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