Pension rule changes – Simplified

Pension reforms

Pension plans are now more flexible, the government is allowing you access to your money however you want (that’s nice of them seen as it is your money). Ok this does come with a few caveats, you can take as much of your pension as you want at anytime and it will be taken as 25% tax free and then 75% taxable. The taxable part will be as though it was overtime from work, so if you earned say £50,000 that year and took out £100k from your pension pot £25,000 would be tax free and then the other £75k would be charged as income taxable at 40%. So obviously you want to be clever in your withdrawals so that you have money left for when you need it and that you are not taxed too heavily on the withdrawals.

55% death charge removed, this is a welcome removal as it was very hard to avoid as there was usually always an amount of money left in the pension pot on death so the estate were forced to pay it. On death it used to be that if the pension pot was cashed in there would be a 55% tax charge, no longer the case.

You do not have to buy an annuity, in truth this was always the case but this campaign helped promote this fact and allowed it to be more acceptable for clients with smaller funds who may have bought an annuity in the past to do something different. That something different is PENSION DRAWDOWN, the FCA had always said that unless you had £100k or more then you should not really go in to pension drawdown. These recent pension changes are almost promoting drawdown over annuities for everybody.

What is pension drawdown? Essentially it’s the alternative to an annuity but can come in many forms, which is where is all gets complicated but ultimately an annuity gives you the fixed income for life a drawdown gives flexibility but ultimately your fund can run out.

Over the next couple of weeks I will be looking at specific examples of different clients and seeing how these changes may effect them, keep reading.

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