As pretty much everyone is aware, major changes have happened to the pension systems and became effective as of Easter Monday. There is still a lot of uncertainty around these new changes, compounded by the problem that even pension firms are not all yet up to speed on how these changes will affect those of pensionable age.
While the nitty-gritty is still to be worked out by many, there are some things that we do know for certain, although how they will impact on individuals is still to be seen. As with anything, there are benefits and drawbacks to this scheme, some of which will be outlined here.
The first thing that you will need to consider when looking to draw out a large sum of money from your pension pot, is that you could be landed with a large tax bill! If you take out 25% of what’s in your pension pot then you will get that amount tax free. If, however, you take out a smaller or larger amount, only the first 25% of that will be free of tax. Tax will have to be paid on each occasion that you withdraw a lump sum. If you do end up withdrawing over 25% of your total pot, you will have to pay income tax on anything above the 25% allowance. You also need to consider that if all of your income exceeds £42,386 (2015-2016) then you will be taxed at the higher thresholds of 40% or more!
Some will relish the ability to take out lump sums from their pension pots and either invest them elsewhere (buy-to-let houses etc.) or spend some of it on the luxury holiday they’ve always dreamt of. However, this doesn’t mean that you have to take out all or any of your pension pot in one lump sum: the option of having an annuity is still open to you meaning you are still able to have that fixed amount paid into your bank account each month.
There are new rules come in to force as of 1st April 2016 that the amount you are able to have in your pension pot has also changed. Whereas you used to be able to have £1.25 million in there, you are now limited to £1 million.
If you’re bamboozled with all of this then why not get in contact with Thompson Financial Consulting and ask their advice over these new changes.