Following the news last week that we would all have freedom to access our full pension pots at retirement, the media quickly began talking about sports cars and luxury holidays. The problem with the way in which the new pension rules were presented, was that the ‘take the full pot at retirement’ option seemed to be the only one which was being discussed.
The media seemed to miss the fact that for many people an annuity or income drawdown will still be the best way to go, especially for those with low levels of other pension income. While we welcome the new flexibility and simplicity being introduced into the pensions landscape, it does come with several health warnings, namely:
– The risk that people ‘take the full pot at retirement’ and spend all of the money. Clearly this will leave them with a lower income for the rest of their lives.
– The risk that people ‘take the full pot at retirement’ and don’t spend the money. All the saver would have done here is transferred capital out of a tax efficient environment, into a taxable one and paid a large chunk of income tax in the process.Hardly prudent financial management.
– The risk that people will ‘take the full pot at retirement’ and purchase a buy to let property. This particular option seems to be a favourite in the media at the moment, however it does come with some notable flaws. First of all, income tax will need to be paid on the full pension fund (minus the 25% tax free cash), which for many will push them into the higher (40%) rate tax band. A property will then need to be purchased which will incur stamp duty and many other costs, and finally income from property is taxable.
There are many other pitfalls to be aware of when planning your retirement. If you would like advice on suitable options for you, please contact us here.
