Taking money from a pension – watch for tax

The rules regarding pensions has just changed from April 2015 with the Pension Reform, giving pension holders greater flexibility as to when and how they draw their pension fund. It’s a welcome update to legislation that is aimed to encourage greater savings into pension funds again in future years. Holders of a “defined contribution” or “money purchase” pension scheme are likely to be able to draw their pension from aged 55 – check with your pension provider to be on the safe side.

What are the tax consequences of drawing your pension?

Usually 25% of the pension fund can be drawn as a lump sum with no tax implication. The other 75% however, is likely to be subject to tax. How much will depend on your personal tax circumstances within that tax year. Pension withdrawals that are taxable will be added to your other taxable income for that year and tax will apply at the relevant percentage, whether that is at 20%, 40% or 45%, for those in top rate tax.

Planning is essential …and there is no rush

This is why planning is essential as it may save you tax by spreading withdrawals across several tax years or waiting until you have stopped working, to utilise the personal allowance and lower rate tax bands. And there is no hurry! Just because the rules have changed, there is no pressure on you to make a decision now – ensure you have all the right information before proceeding taking into account your personal and business position as well as your investment choices, attitude to taking risks and of course, any tax consequences.

Take advice as some rules are tricky

Pensions can be complex and even though the opportunities for pension holders have been widened, it doesn’t apply to everyone. For example, “defined benefit” and “final salary” pensions have stricter rules and you may or may not be able to draw out funds in the same way, depending on your provider. Also, rules around cashing in annuities on a “defined contribution” pension are on hold until April 2016, so it’s worth distinguishing between the two types of pension set up.

Do tax credits apply to you?

Taking money from a pension fund could affect your tax credits position as pension income classifies as “income” for all defined purposes and can go towards your overall household income. This could mean your tax credits are reduced in future years or an overpayment may be incurred, which would need to be paid back. This is something to watch out for, as this isn’t such publicized information.

State benefits may also have an effect

As with tax credits, State Benefits and Local Benefits, like Council tax support, may also be affected as regular pension withdrawals are usually considered income. Check your situation carefully before withdrawing from your new flexible pension arrangement. Figurit take pension planning into account as part of an overall tax planning strategy for our dental and medical clients. We are also connected to specialist financial advisors who can help with the detail around your policy. Call today to discuss your situation. T: 020 7376 9333 E: info@figurit.com

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