Watch for tax if drawing from a pension
The Pension Reform brings good news for those approaching retirement. Pension savers aged 55 or over holding a “defined contribution” pension are able to gain access to their pension fund, should they choose to, in line with new legislation.
This now gives pensioners options – continue investing, draw a regular income or perhaps take a lump sum to pay off debt or reinvest elsewhere.
It’s essential to watch out for tax though.
Typically, 25% of the pension fund can be draw, tax-free. However, after this income tax will apply on the remaining 75%. Depending on your current tax position will depend on the rate of tax but in short any income drawn from the pension will be classified as “taxable income” and added to other income sources; employment, self-employment, savings, dividends and property related income.
By planning carefully you can ensure you are paying the right amount of tax on the income you are drawing as it may benefit to spread withdrawals over a number of tax years or waiting until other income sources have ceased so you can maximise your tax reliefs that way.
The important thing to note is there is no rush to make a decision.
These rules are now in place but you have time to research your options properly.
Other things to note for:
- Defined benefit and final salary pensions have different rules – take advice
- Tax credits can be affected. Because pension income is also considered part of your overall household income, tax credits can be valued differently, often resulting in a reduction or an overpayment – be careful
- State benefits may also be affected
- Cashing in annuities on a defined contribution pension is not available until April 2016
Figurit take pension planning in account as part of our overall tax planning. Please call today for a friendly chat about your retirement plans.
T: 020 7376 9333
E: info@figurit.com
