When George Osborne introduced the new ‘pension freedoms’ that come into force in April this year he told the House of Commons that it was right that people got to use their pension investments however they wanted and whenever they wanted. Well as soon as they reach 55 that is.
From April this year you will indeed be able to access your entire pension fund on the day of your 55th birthday, but it might not be the smartest thing to do. Not only because it might leave you skint before you get to 60, but because it cause you a huge tax bill in the tax year that you take the money – and the Chancellor was very quiet on the tax implications of his pension reforms.
For example, let’s say you have an income of £30,000 a year and you have £75,000 in your pension pot. When you access your pension fund you can have up to 25% tax-free, in this case £18750. The balance, £56250, will be added to your income for this year, giving you a total income of £86,250. The first £40,000 will be taxed at either 0% or 20% meaning that around £45,000 will be taxed at the higher rate of 40%, a whopping £18,000 that you will have to pay to HMRC.
And here’s the other thing that the Chancellor didn’t major on. All of these extra tax payments coming from people who do cash in their pensions will do a wonderful job in swelling the Exchequer’s pockets, a huge potential hike in the country’s tax receipts.
And, in my darkest more cynical moods I see two further repercussions of these ‘freedoms’ that the Chancellor managed to avoid mentioning. Firstly it may mean that when you go to be assessed for long term care in the future you might be told that your pension fund needs to be counted as part of your assets, because you can access them as soon as you get to 55. Secondly there are tens of thousands of homeowners who have no visible means of repaying interest-only mortgages taken out before lenders tightened the rules. Well they do now if they have access to cash in a pension fund.
There is no doubt that pension rules needed to change, to help those who may have been forced into buying poor value annuities that tied them in for ever. But they perhaps didn’t need to change so radically so quickly, and it was surely incumbent on the Chancellor, and his Government, to make sure that we all understand the effect of these changes before we sleepwalk in to a late middle-age disaster.