Select Page

Don’t Suffer a Pension Hangover

by 6 February 2018Pensions


 
 

You can now draw out your whole pension pot in one go – at least in theory. But, like drinking a whole bottle of champagne, what might sound fun can end up being a headache. If you don’t want a tax-induced pension hangover, it pays to know your limits.

 

Pension freedoms

A pension is far and away the most tax-efficient way to save. There’s tax relief on everything you pay in, and also no tax on the investment growth. But what you might forget is that tax does come back into play at the end, when it’s time to take the money out.

Under pension freedom, you now have full access to your defined contribution pension pot. Even better, 25% of it will be tax-free. But that means three-quarters of it will be subject to the normal rate of income tax. This is because money drawn from a pension counts as income – it’s not like money in the bank that you already own. But YouGov research published by SavvyWoman shows high levels of confusion surrounding pensions and tax, with nearly 1 in 5 (17%) contemplating drawing out the whole lot at once. As we’ll see, such a binge really isn’t a good plan.

 

Pace yourself!

Suppose you have a pension pot of £80,000. You can take £20,000 of this straight away and pay no tax on it ever. But now the familiar income tax rules come into play. You can draw another £11,500 for the year and pay no tax on that, because that’s your personal allowance. But anything above that in the same year will be taxed first at 20%, until you reach the next band. You’ll pay 40% tax on everything over £45,000 and so on.

It gets even more complicated if you have other sources of income, such as a salary (you don’t have to be retired to access your pension, you just need to be 55 or over), rent from properties, or final salary pensions. Everything contributes to the total, so you may find you don’t need to draw out very much at all to tip you into a higher tax band. Having saved up your pension tax-free for most of your life, you probably don’t want that money being suddenly taxed at 40%.

 

Wrapping up

So remember: when it comes to pension freedom, just because you can do something doesn’t mean you should. Always keep one eye on your total income level for the year, plan ahead and pace yourself. As with celebrating your retirement, the key to drawing your pension is moderation. A binge on that savings pot may be tempting, but you could end up regretting it in the morning.

If you would like to talk about your pensions and retirement planning or need more general help with your finances, please get in touch with us

 

This article first appeared on Unbiased.

Don’t Miss Out

Never miss a NorthStar blog post again.

Join over 3,000 happy subscribers who receive NorthStar Insights – our free email newsletter, helping you stay right up-to-date with the latest financial news with expert insight to help you make the most of you money. You’ll receive a weekly email covering important financial topics as well as special offers and exclusive services.

You can also follow us on social media.

 Accreditations & Trade Bodies

Don’t Suffer a Pension Hangover ultima modifica: 2018-02-06T10:09:40+01:00 da Derek
premade-image-20new2

Join Over 3,000 Happy Subscribers

Stay right up-to-date with the latest financial news, get expert insight and analysis and exclusive special offers to help you make the most of your money. NorthStar Insights is the free email newsletter enjoyed by over 3,000 people across the UK. Join them to see what all the fuss is about. 

 

(Great content every week. No spam. Guaranteed.)

NorthStar privacy policy acceptance.

Thanks for subscribing to NorthStar Insights. Check your email to confirm your subscription.