You may have heard about the pension reforms that came into effect on the 6th April 2015. The reforms introduced changes that offer more choice and flexibility on what you do with your pension savings if you are aged 55 or over.
There has always been the option to take 25% of your pension pot tax free, but with the new pension changes you can now take your whole pension pot in one go.
You have many options available to you:
- Leave your pension invested if you don’t need to take money straight away
- Take the tax-free cash and leave the rest invested
- Take some or all of the money as a cash lump sum
- Buy an annuity to provide a lifetime’s secure income
- Mix and match
Taking your whole pension fund as a cash lump sum is the biggest change to come out of the 2015 pensions changes, so what does it all mean?
The pension changes mean you can access your pension fund as and when you like, from the age of 55, (rising to age 57 in 2028). One option is to take the whole pension pot in one; however it’s important to remember the first 25% of your pension pot is tax-free and you will pay Income Tax on the remaining 75%.
Income Tax Charge
Taking your entire pension as cash could involve a high tax charge. There is a personal allowance (£11,000 for 2016/2017), on which no Income Tax is paid. Above this amount, tax is paid on your total income. Currently, the tax bands are 20%, 40% and 45% depending on your income. So, any cash you take out of your pension (except for your tax-free lump sum) is added to your income for the year, and may well push you into a higher rate tax band.
There are added risks you need to consider, such as:
- Paying too much tax on pension withdrawals
- Buying unsuitable investments
- Using all of your funds too fast
It’s important to take expert pensions advice, so that you make an informed decision. Whatever you choose to do, it’s important to understand the tax implications and consider all your pension options to avoid any unnecessary tax bills. Your NFU Mutual Financial Adviser* can help you review the retirement options available to you and make recommendations to suit your personal situation.