There are over half a million people in the UK over the age of 90. Fifteen thousand are centenarians. A consequence of us all living longer, is choosing to work longer. But look out, the chancellor could penalise you unless you avoid the penalty on pensions for working.
If you have taken cash from your pension and are still saving for retirement, read on. In April 2015, the government introduced what they called, pension freedom. A new set of tax rules that gave you more flexibility on how to access your pension pot from the age of 55.
Under the new rules, you can keep your pension invested and draw from it as needed, or even cash in your pension in its entirety. That means you don’t have to buy an annuity.
Up to 25% of your pension pot can be taken tax free, either in one lump sum or as the first 25% of subsequent lump sums. Income tax will be charged on withdrawals beyond that, but the exact amount will depend on individual standard income.
In the first year after George Osborne relaxed the tax rules on how much access you can have to your pension, HMRC data revealed 232,000 people took advantage of the changes. They withdrew at least £4.35bn from pensions in just those 12 months.
What many of those people didn’t realise, is that if you continue to work and make contributions to your pension after a drawdown, you could start to pay more tax. Withdraw anything from £1 from your pension pot and you can then only contribute up to £10,000 per annum to your pension tax free, instead of the usual £40,000 annual allowance. This is called the Money Purchase Annual Allowance (MPAA).
As we have seen a trend in our clients’ plans to reduce their working days gradually, rather than the traditional approach to just packing up completely. It will penalise you most if you withdraw a large sum to pay off your mortgage or help a child onto the property ladder and carry on working.
But it gets worse.
Chancellor Philip Hammond has consulted on reducing the allowance further to just £4,000, since he spoke about it in his Autumn Statement. That means any pension savings you make over £333 a month would be taxed if you have received any benefit from your pension pot.
The chancellor refers to this benefit as an ‘inappropriate double tax relief.’ The way the tax man sees it, you received tax relief when you took the cash lump sum and you receive it again when you pay it back in.
Given the pressure the government is under to find tax revenue wherever it can, without harming what is looking like a fragile economy, measures like this are sure to feature in the budget on 8 March 2017. The Treasury estimates it can claw back some £70 million tax revenue from just this loophole, and they are sure to have others in mind too.
You can easily get caught out if you are part of a company pension scheme and cash in a stray private pension without taking this into consideration. So, whatever changes you make to your pension, you should get professional advice.
If you have any questions about your retirement, or what comes out of the forthcoming budget, get in touch today.
The Financial Conduct Authority does not regulate taxation and trust advice.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, all of which are subject to change in the future.