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Since the new pension freedoms were announced in April 2015, if you are over 55 you have been able to withdraw money from your pension in a whole new way, you can now even withdraw the entire pension pot if you wish. However, before you make a decision on withdrawing money from your pension it is a good idea to familiarise yourself with the new tax implications so that you do not pay too much tax. The key point to understand is that money that you take from your pension pot may be added to your taxable income for the current period and will be taxed at your marginal rate. Therefore, if you don’t need to take a large cash lump sum from your pension, you could save yourself a big tax bill by choosing to go into flexible drawdown and take money from your pension pot over a number of years instead.
For example, if you have £30,000 income a year, your
marginal rate of tax is currently 20%. If you cash in a pension pot worth
£90,000, even after taking your tax-free lump sum (currently 25% which equates
to £22,500), your total income for the year will be £97,500. This pushes you
over the 40% tax threshold (£31,785 in the 2015-16 tax year after the personal allowance). Below the 40% tax
threshold you will be taxed at 20% for everything above £10,600. £10,600 being
the 2015-16 allowance that everyone can earn tax-free. This would mean that
your tax payable would be £28,403 on your total earnings, or £16,403 on your
pension pot for the tax year 2015-16 (if you have no other income).
Or, if you have £45,000 income a year, your marginal rate
of tax is 40%. If you cash in a pension pot worth £300,000, even after taking
your tax-free lump sum (currently 25% which equates to £75,000), your total
income for the year will be £225,045. This pushes you over the 40% tax
threshold and into the additional tax bracket (over £150,000 in the 2015-16 tax
year). Below the 40% tax threshold you will be taxed at 20% for everything
above £10,600. £10,600 being the 2015-16 allowance that everyone can earn
tax-free. Above the 40% tax threshold you will be taxed at 40% for everything
above £31,785 up to the additional rate tax threshold (currently £150,000 for
the 2015-16 tax year). Anything above £150,000 will be taxed at 45%. This would
mean that your tax payable would be £122,476 on your total earnings, or £83,153
on your pension pot for the tax year 2015-16 (if you have no other income).
Whether you wish to take a lump sum, go into
pension drawdown or take out an annuity will be a decision based on your
individual circumstances and needs. The key to reduce your tax liability is to
understand the trigger events and work with the tools available to you so that
you are not paying undue tax on your pension pot. Although the new pension
freedoms look simple enough on the surface, it is always worth talking through
your options with an independent financial adviser at the outset. Your adviser
will be able to offer advice on all areas of retirement planning including:
triviality and small pots; flexible drawdown; annuities; and tax liability on
death, so that you can put a plan in place that efficiently takes you from
where you are now, to where you need to be in the future in the most tax
efficient way possible.
Home > GDA Financial Partners
Home > GDA Financial Partners
