19
BRIAN DAVIDSON,
PLATFORM PROPOSITION MANAGER AT
ALLIANCE TRUST SAVINGS
EXPLAINS THAT INDIVIDUALS SHOULD TAKE CARE WHEN CONSIDERING WITHDRAWING
INCOME FROM THEIR PENSION TO ENSURE THEY DO SO TAX EFFICIENTLY
From April 2015 individuals who
meet the minimum pension age of 55
will have full access to their pension
(Defined contribution schemes only)
meaning they could withdraw all of
their monies from their pension in
one go. Is this too good to be true?
This article considers the benefits
of keeping monies within a pension
rather than simply withdrawing it all
next year.
REMEMBER THE TAX MAN
Why do people invest in pensions
rather than other vehicles when it
comes to saving for their retirement?
The principle reason people save for
their retirement via a pension is the
tax efficiency both from a savings
and income perspective. Tax relief on
contributions gives retirement savings
a boost while the tax free lump sum at
retirement is probably one of the most
popular features of pensions.
The government has confirmed
that they do not intend to reduce or
remove the option of taking a 25%
tax free lump sum for your pension
from April next year. The key point to
remember is that any further income
you take is subject to income tax at
your marginal rate(s). No matter how
you take an income whether it is via
regular payments or more ad-hoc
larger payments it will be taxed at your
marginal rate of income tax (subject
to personal allowances). The potential
tax trap from next year is that by
taking all or large sums of monies from
your pension in the one tax year your
marginal rate of income tax on that
lump sum can increase significantly
from their normal rate of tax. This
means that by taking a lump sum your
marginal rate of income tax could
increase meaning you could move
from the 20% tax bracket to a 40% or
45% bracket.
There are also other benefits to
keeping monies within a pension.
THESE INCLUDE:
//
No Capital Gains Tax within a
pension wrapper
//
Normally not subject to
inheritance tax
The new flexibility being proposed is
to be welcomed, but it is worth
remembering some golden rules:
//
If you are reliant on the monies
within your pension to sustain your
lifestyle then it is likely you need
the monies to last until you die.
//
Consider your dependents – If you
die will these monies be required to
fund a loved one’s retirement.
//
Consider how secure the other
forms of income you receive
are? Are they dependent of
investment performance or are
they secure?
//
Before taking income from your
pension complete a review of
all of your savings. Only by
understanding your current level of
savings and income can you make a
decision on what income you nee
from your pension.
//
Consider consolidation – Prior
to taking an income from you
pension many clients consolidate
the various arrangements the
have into one, increasingly into a
Self Invested Personal Pension
(SIPP) due to the investment and
income flexibility offered. By
consolidating you can often reduce
the impact of charges on your
pension savings.
//
Consider the retirement income
that you will need - short, medium
and long term. Remember, when it
is gone it is gone!
//
It is not the end of annuities – many
people will quite rightly still be
attracted to a fixed income for the
remainder of their life.
//
You don’t need to have all the
answers. Taking a retirement
income is one of the most important
financial decisions you will ever
make and therefore don’t be afraid
to seek professional financial
advice even if you normally regard
yourself as a DIY investor.
So when next April comes around and
you have access to your whole pension
pot a Ford Focus* and sustainable
retirement income may make more
sense than a Ferrari sitting in the
drive!
* PS (Before readers take offence
Brian Davidson Platform Proposition
Manager at Alliance Trust Savings is a
proud owner of a Ford Focus).
Risk information - This information is for information purposes only and does not constitute advice. Investments can go down as well as up. You may
get back less than you originally invested. Please note that all investments carry an element of risk and if you have any doubts as to the suitability of
any investment please consult a professional financial adviser. Laws and tax rules may change in the future without notice. The information here is
our understanding in October 2014. This information takes no account of your personal circumstances which may have an impact on tax treatment.
