Tax traps to avoid when cashing in on pensions
Latest statistics show the overall value withdrawn from pensions continues to rise. For some people, this may have unforeseen tax consequences.
Personal pensions can usually be accessed from age 55, and there is considerable flexibility over how funds are accessed. What is key, however, is ensuring that there are sufficient funds to last out retirement, and the latest Financial Conduct Authority data continues to spark concern that some retirees risk cashing in too much, too soon. Rushed decisions to take out funds - in response to rumours of tax changes, for example - can mean swapping a beneficial tax shelter for a tax bill, and it is important to be aware that cashing in the whole of a pension pot at once may push you into higher rates of tax.
When accessing your pension, a lump sum of 25% of fund value can usually be taken free of tax. The sum is capped, with the limit usually a maximum of £268,275. In cases where previous protections apply, the limit may be higher. For defined contribution schemes, one of the most frequently-used strategies is to combine taking the 25% lump sum with other options, such as buying an annuity; using income drawdown; or taking some or all the rest in cash. The remaining 75% is treated as taxable income. Added to any other taxable income, it is then taxed at your normal rate of Income Tax in the year of withdrawal.
We have in-depth knowledge to support your decisions around pensions access. Please contact us for help in planning your next step.
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