In or out? Pensions choices for the over-55s

The start of the new tax year sees the coming into force of so-called “pension freedoms”.  Essentially, it is now possible for individuals with “defined-contribution” pension pots to take the whole sum out as a cash lump sum on reaching age 55.  But however tempting that prospect may seem, it’s not a decision to be taken lightly.  Quite apart from the strong likelihood of battalions of dubious “financial advisers” picking up the scent of gullible investors with new-found wealth like wasps at a picnic, there are tax issues to consider.  They are three-fold.

First, 75% of the amount withdrawn will itself be subjected to Income Tax.  And, of course, if a large lump sum is drawn out it is likely that all or most of it will be taxed at the very highest rate of Income Tax.  Second, should you choose to invest all or part of the lump sum (rumour has it that many will be looking at buy-to-let property), the income and gains arising from the investment will be fully chargeable to tax: contrast that with tax-free growth in a pension fund.  Third, when the inevitable happens, any value represented by the investment will form part of your estate for Inheritance Tax purposes: again, to be contrasted with the scope for passing the benefit of a pension fund free of IHT.

We don’t say that drawing out the whole fund will never be the right thing to do.  But it warrants a great degree of careful consideration.  For help in balancing the issues, please get in touch your usual BKL contact partner or use our enquiry form.

David Whiscombe


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