Posted by admin - October 31, 2014 9:55 am
Treasury announces additional Pension freedom
Our previous blog post, Pension Changes highlighted key changes announced by the Government in this year’s budget, providing pensioners with greater flexibility of accessing their pension funds. However, at the time of the budget announcement no mention was made to changes to the taxation of pension funds.
Taxation of pension funds – current
Under current rules people aged 55 or over, can take 25% of pension savings as a tax-free lump sum, as a one-off arrangement, with the remaining pension funds used as a taxable retirement income, most typically in the shape of an annuity. In a draft Pensions Bill the Treasury is set to change the tax rulings for pensions from April 2015 whereby individuals approaching retirement and existing pensioners will be able to take a series of lump sum withdrawals, rather than being forced to buy an additional financial product after a single drawdown. In addition, a quarter of every drawdown will now be tax free, with the remaining 75% of any drawdown being taxed at only their marginal rate.
Taxation of pension funds – new
Chancellor George Osborne said of these new changes: “People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan. From next year they’ll be able to access as much, or as little, of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax free. He continued to say that: “For some people an annuity will be the right choice whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown.
MFW Comment
“These changes represent a double edge sword, for the more financially responsible these changes will provide complete freedom to use the funds in the best way possible. However, for others it will only add additional confusion to an already complex area. I would, therefore, strongly recommend that any individual approaching retirement age seeks out professional advice from both a pension provider and tax specialist in order to obtain the right advice”.
If you like to understand more about how you can minimise taxation on your pension funds then contact your local MFW office who will be pleased to help you keep more of your hard earned money.
