Is It A Good Idea?
The UK has recently reformed some of its pension rules. From 6 April 2015 these reforms include:
- A new flat rate state pension,
- Tax changes for the beneficiaries of your retirement fund,
- No more annuity purchase requirements.
There is also an option to withdraw from your pension schemes with complete freedom from the age of 55.
Who wouldn’t want to access their pension in this way? This may sound tempting, but these ‘pension-freedom’ changes could encourage overzealous salesmen to operate pension scams and take advantage of these newly accessible lump sums. Reportedly insurers have already had to block thousands of these fraudulent transfer attempts.
Another major drawback is getting landed with large tax bills.
You may be happy to access your pension early once you reach 55, but only 25% of your retirement savings will have no tax liability. The remaining 75% will be taxed as income and you could risk falling into the higher tax bracket by dipping into your pension pots too freely.
UK pension providers will begin to apply emergency tax at a rate of 45% to any withdrawals over the standard 25% tax-free amount.
So if your pension is valued at £100,000 you would be entitled to £25,000 tax-free, however you could get a tax bill of £33,750!
Reclaiming any of this overpaid tax could mean waiting until the end of the tax year.
So if you are considering taking advantage of this new option and you believe you are qualified for it, be sure to consider all the possible outcomes.
So make sure you’re not affected by keeping your retirement saving in a recognised pension fund. It is the best way to ensure your future is secure.