New Pension Freedoms

The Liberal Democrats have brought Pension Freedoms for those aged 55 and over who have a defined benefits pension.

It is your hard earned money.  You should be able to use it as you feel fit.

Liberal Democrat Pensions Minister Steve Webb said:

“As a Liberal I believe people should have the freedom to do what they want with the money they have saved up throughout their working lives. Our pension reforms will mean millions more people will have a better retirement.”

There is no need to rush to do anything as any tax breaks that you have – such as 25% of any withdrawal being tax free – are available throughout this tax year. The tax year runs from April 6th to April 5th next year. This gives nearly 12 months to sort anything out. Always be careful if you withdraw large sums as the taxable portion could take you into a higher tax bracket and it may be impossible to undo the error.

How much is a large sum? Definitely more than £56,380. However lower sums may also take you into a higher tax bracket. To find out if a withdrawal would take you into a higher tax bracket perform the following calculation:

  1. How much do you intend to withdraw?
  2. Subtract 25% for the tax free portion but check with your pension company as this figure can vary and could be 0%.
  3. Add all your gross pay that you expect to receive between 6th April 2015 and 5th April 2016.
  4. Add all your gross interest from saving and bonds (usually net interest multiplied by 1.25) that you expect to receive between 6th April 2015 and 5th April 2016.
  5. Add all your gross dividends from UK companies (usually the dividend paid multiplied by 1.11) that you expect to receive between 6th April 2015 and 5th April 2016.
  6. Add in all your foreign dividends  that you expect to receive between 6th April 2015 and 5th April 2016.
  7. Add in any other taxable income (e.g. from rental property)

If the final figure is more than £42,285 then you will probably be paying income tax at 40% (or more).

This is a very simplified example and you should consult a financial adviser for advice tailored to your own individual circumstances.

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