Newsletter Spring 2015

Pot of gold

From 6 April 2015 anyone with a defined contribution (money purchase) pension scheme can extract all their pension savings from that scheme once they reach age 55.

If you are tempted to access your pension pot in this way, please think about the tax consequences. Under flex-access drawdown, the first 25% of your pension savings can be taken as a tax-free payment, but the rest will be taxed at your marginal tax rate in the year you extract those funds.

Taking out a large sum in one go may push you into the higher tax band. If you extract more than 25% of the fund in 2015/16, you need to budget for the significant tax bill which will be payable by 31 January 2017.

What are you going to do with the money you extract from your pension fund? You may need an income in retirement, so investing in some form of income-producing asset would be wise. Be sure to take advice from a qualified IFA, and beware of schemes promising high returns which could be scams.

Once you start to take money from your pension fund you will face restrictions on what you can put back in. To prevent you from recycling funds back into a money purchase pension scheme with tax relief on the contribution, your annual allowance will be restricted to £10,000.

Also once the funds are outside your pension scheme they become liable to inheritance tax at 40% on your death, unless they are invested in shares, agricultural or business assets that qualify for relief from inheritance tax.

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