Share Prices & Company Research

Press Release

07 February 2019

Pension freedoms: flexible friend or potential tax trap?

James Andrews, Director – Head of Investment Management, discusses how to navigate the options available for planning for retirement

Back in April 2015, the changes to private pensions announced in the Budget were some of the most radical changes seen for centuries. Since then, they have allowed people to have far more choice, but they have also added complexity in the decision as to what to do with your pension savings.

As was previously the case, you can take a quarter of your pension pot as a tax-free lump sum. However, the key change was to remove the enforced requirement to use the remainder of the money to buy an annuity (a product that pays you an income each year until you die). Instead, anyone aged 55 and over can take any amount from zero to the whole pension pot as a lump sum, paying no tax on the first 25% and the rest taxed as if it were a salary at your income tax rate.

What has recently come to light, though, is that people were unaware of the tax trap that potentially lies in wait. Figures recently released by HMRC show that 980,000 over 55s who took advantage of new pension spending freedoms between 2015 and 2018 caused an irreversible reduction in their annual pension tax relief allowance, from £40,000 to £4,000.

Essentially, if you take any amount over the 25% tax-free allowance, you trigger this reduction in what is called the money purchase annual allowance. That means that over 55s who take over the 25% tax-free amount and then keep on paying into a pension are only allowed to claim tax relief on just £4,000 of those payments per annum. Therefore, anyone paying into a pension over the lowered limit of £4,000 is set to incur an unwelcome tax charge.

However, if you are not intending to save any more into your pension, the flexibilities are welcome and allow you to stay invested for longer taking out what you need out rather than what you were allowed. Furthermore, should you die before the pot runs out, this now forms part of your estate to pass on to your loved ones.

The key to making the right decision is to be honest about how much income you will need and how much is achievable with your pot. One of the biggest issues that retirees face is estimating how long they will live for.

We are a pessimistic bunch in the UK and perennially underestimate how long we will live. Be cautious, look forward to that telegram from the Queen at your 100th birthday and you should be safe!

Here at Redmayne Bentley we spend a lot of our time building bespoke investment portfolios that are fine-tuned to achieving a specific level of income in retirement. Our trusted and experienced investment managers are here to help you enjoy life, protecting and growing your money so you can focus on what is important to you.

You can follow us on Twitter

Redmayne Bentley offers a full range of services, from investment management services suitable for different life stages, through to traditional stockbroking, dealing with advice and tax efficient investments.
Pension freedoms: flexible friend or potential tax trap?
We use cookies on this site to improve your experience and help us provide you with a better website. An explanation of the cookies we use and their purpose can be found within our Cookie Policy. Your continued use of this site means you consent to the use of cookies.