Although Chancellor Philip Hammond has recently made an embarrassing U-turn on National Insurance Contributions, pension freedoms have definitely eased the blow.
Pension Freedoms Are Widely Recognised As Being Good News, But Don't Under-Estimate The Unintended Consequences Of Pulling Out Too Much Cash!
Pension Freedoms Bring In Bucket-Fulls Of Income Tax
Two years after pension freedoms were introduced, HM Treasury has reported that it’s already raised £1.7 billion more Income Tax than initially expected. This is largely due to the fact that people are drawing out so much cash, they’re inadvertently being clobbered with some pretty chunky amounts of tax as a result.
The treasury originally expected receipts of £900 million in the first two years of pension freedoms. So having pocketed £2.6 billion in this period, future figures have been revised upwards.
The additional Income Tax is primarily due to the fact it was initially believed people would spread their pension freedoms withdrawals over four years. But this has been changed to three years, resulting in significantly more tax being paid.
There’s also evidence that many people are taking advantage of historically high transfer values from defined benefit final salary pension schemes, typically drawing out this money at a much faster rate than the income would have been paid under their former pensions.
Is Pension Freedoms A Double-Edged Sword?
In many ways, pension freedoms has been good news all round.
More money for UK PLC. And more money for pension holders.
But when you scratch the surface, it might reveal that all might not be too rosy as time passes.
The obvious point of concern is that if you pull out your pension fund too quickly, not only could you suffer increased Income Tax in the short term, your long term financial future could be in jeopardy too. A smaller pension fund might well make it more difficult to give you the level of income you’ll need for a comfortable retirement, and as we’re generally living longer, your later years could well see you short of money.
This subject was covered in some detail by Andrew Oxlade, a former head of personal finance for the Daily and Sunday Telegraph, in a helpful article entitled What is a safe amount to take from a pension?.
A More Detailed Review Of Pension Freedoms
In a well put together analysis, FTAdviser has published its pension freedoms findings in a report entitled Pension Freedoms Step Up A Gear.
From age 55, under pension freedoms, you now have six options open to you, giving you much greater access to your pension money:
- Leaving the pension pot untouched.
- Purchasing an annuity.
- Getting an adjustable income (flexi-access drawdown).
- Taking cash in chunks (uncrystallised funds pension lump sum).
- Cashing in the whole pot in one go.
- Mixing any of the options.
James Rainbow, the head of of UK financial institutions for Schroders said:
The traditional routes are a well-trodden path, but the markets have made it difficult for anyone seeking an income. People are having to get more imaginative with their sources of income.
His interview, lasting just over four minutes, can be heard in full by clicking the image below.
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