I’m still faced with lots of questions from people confused by the changes to the pension legislation that came into force recently. Under these new rules it has become possible to take all of your money out of your pension fund as soon as you reach the age of 55. But just because you can do something, it doesn’t mean that it’s a good thing to do.
The Government, in particular George Osborne who was Chancellor at the time, made it all sound really attractive when he stood up on Budget day and announced the changes. ‘It’s you money, you should be able to do what you like with it’ was what he seemed to be saying and while, within limits, that’s the case, what the Chancellor didn’t explain very well at the time were the tax implications of taking all of your money out of your pension at 55. Although the first 25% of your fund might be tax-free the rest of it is likely to be added to your income for the year in which you take it out of your pension. If you are still working it is possible that this could push you into a higher tax bracket and you might end up paying tax at 40% or even 45%. In some cases emergency tax is applied to the payment which means that you could be left with 50% of your money after tax.
He also didn’t explain the fact that you would have to go through an advice minefield to find an advisor willing to advise you to take this course of action. For many of us a pension is likely to be our only source of income at retirement and it won’t necessarily be a good idea to take all your money out of it as soon as you can to buy a car or pay off some debts, and many advisors will tell you this. They will also charge you to tell you not to do anything which is upsetting some people, and is another thing that the Chancellor didn’t make very clear initially.