Even before the new pension rules come into force in April 2015, Government changes have been introduced to dramatically reduce your tax relief!
Your Pension: They Giveth With One Hand, And Take Away With The Other!
Think Twice Before Your Withdraw Your Pension Fund
Motivated by the thought of being able to buy a Lamborghini, or to whip out your pension fund to invest in buy-to-let property, it seems the Government is one step ahead.
If you’re planning to have a bit of a bonanza with your pension fund from April 2015, or when you reach 55, it’s worth taking note of the Government’s recent pension rule change.
Currently, you can contribute up to £40,000 per year into your pension. But if you make the most of the new flexibility to withdraw funds from your pension, your maximum contribution will be slashed to £10,000 per year.
The reason the Government has imposed this restriction is to reduce the risk of people recycling their tax-free lump sum, by reinvesting into a new pension to receive tax relief again.
The new limit will only affect you if you access any of your pension funds that are worth more than £10,000. You’ll be able to make withdrawals from three small personal pension pots and an unlimited number of small occupational pension pots worth up to £10,000 each, without being subject to the restriction on further contributions.
You’ll Be Caught If You’re Currently In Pension Drawdown
Under current flexible drawdown rules, if you’ve proved you have an annual income of at least £20,000 and you’re drawing out your pension fund, you’ll be subject to the new £10,000 annual pension allowance limit from April 2015.
You could also be affected if you’re currently in drawdown, whether you’re drawing an income or not. From April 2015, as soon as you withdraw from your pension an amount in excess of the capped amount, you’ll be caught by the new restriction. That’s a pension withdrawal in excess of 150% of the GAD rate, for those of you that are affected.
In a rare case of reasonableness, the Government believes it’s ‘unfair’ to apply the £10,000 annual allowance to anyone who didn’t know they would be subject to the new pension rule when they entered drawdown. So providing you remain within the capped limit, you’ll still be permitted to contribute up to £40,000 per year to your pension, subject to changes in the annual allowance.
Don’t Make This Expensive Pension Mistake
Whilst £10,000 per year is still a reasonable pension contribution, the radical liberalisations announced in the Budget make it a sensible and tax efficient move for almost every one of us to fund our pension to the absolute maximum.
Here’s the point. Grabbing hold a few quid from your pension fund at age 55, or soon after, could seriously affect your ability to create a financially secure future in the years to come. For most of us, that’ll be decades. For predictions estimate there’ll be hundreds of thousands of us living to 100 and beyond, implying it could be a massive mistake to limit your annual allowance to £10,000 when you’re only half way through your life.
Over the years, inflation will have a ravaging effect on the £10,000 annual pension allowance. And that suggests “a bird in the hand is not necessarily as good as two in the bush”.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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