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Due to the potential complexities involved, it makes sense to be able to deal with a firm that offers both financial planning and tax advice under one roof and Armstrong Watson can help.
As our previous articles have highlighted, those aged 55 and over now have significantly greater flexibility when accessing their pension funds and according to recent press reports, have withdrawn in excess of £1bn from their pension savings since the freedoms were introduced in April.
The choices available now can be bewildering and so great care needs to be taken as the decisions you make now could not only affect your standard of living in retirement, but also affect your pocket and complicate your tax affairs.
Withdrawing some or all of the accrued benefits from your pension savings will result in the payment of Income Tax for the majority of people. This may mean that some pensioners find themselves unwittingly paying too much (or too little) tax whilst at the same time triggering the need to complete a tax return.
During the coming weeks we’ll cover some of these common scenarios and our first case study assesses the tax implications of taking a one-off lump sum from a pension plan. These aren’t real clients, but you’ll get the picture and as this example shows, even though the flexibility exists to withdraw a pension fund in its entirety, in many cases it isn’t necessarily right or the most tax efficient thing to do.
Bill and Ben are in business together and each has accumulated a pension fund worth around £45,000. They are both in their 50’s and in reasonably good health. Having heard about the new pension freedoms they, like many others, have sought advice on how they go about withdrawing their pension funds in one lump sum. What Bill and Ben haven’t really considered (or been aware of) is that there are tax implications in doing so.
Like many business owners Bill and Ben take a small salary and make up the bulk of their income by taking dividends. When making withdrawals from their pensions as a lump sum, each will receive £11,250 tax free, but as the remaining £33,750 is added to their earnings in this tax year, this additional payment now pushes them both into the higher rate tax bracket. As a result, they could both end up paying an additional £13,500 in tax.
Bill and Ben’s personal financial situations need to be considered of course, but if they stagger their withdrawals over several tax years and ensure that the amount they withdraw from their pension funds keeps them within their basic rate tax band, the tax paid could substantially reduce.
In some instances you may owe or be owed tax as a result of taking lump sums from pensions and HMRC has designed new forms specifically for this. As the sums involved could be sizeable, it makes sense to seek professional advice if you are at all unsure.
If you flexibly access any personal pension you must also remember to alert any other pension providers that you have done so, even if your plans are not linked. Failure to do so within 91 days could result in a fine.
Whilst the methods of accessing your pension have become more varied they have also become more complex, so professional advice could be invaluable for many people. If you’re considering accessing your pension benefits contact us to find out the implications.
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