Beware of Budget tax trap on pension withdrawals

The Budget announced unprecedented flexibility and choice in how people can use their pension savings in the future. From April 2015, people over 55 can choose to withdraw their pension savings as they wish, although this will be subject to their marginal rate of income tax in that year.
 
However, MGM Advantage, the retirement income specialist, is warning that a large part of an individual’s pension fund could be payable in tax if they withdraw large sums in one tax year.  Even people who have been used to paying basic rate tax their whole life could find themselves paying 40% tax on part of their fund.
 
This comes as new research shows there is a complete lack of understanding around the implications for taking the whole pension pot as cash, with 59% of people aged over 55 saying they do not understand the tax implications of such a move. The research also shows when the tax implications are explained, people are far more likely (83%) to leave their money in a pension wrapper and draw an income as needed, rather than taking the entire pot as cash in one go. 17% say they are happy to pay tax on any withdrawal.
 
Assuming an average pre-retirement salary of £30,000 and average annuity pot of £35,600someone would pay around 33% tax (£11,867) if they choose to withdraw their entire pension in the same tax year they were earning.
 
Andrew Tully, Pensions Technical Director, MGM Advantage commented: ‘The new freedoms proposed by the Chancellor could result in some scary tax bills for those wanting access to all of their pension savings in one go. While increased flexibility is good and something we fully support, there is a huge potential downside and a minefield to navigate. We need to make sure people fully understand the impact of the tax hit if they want access to their pension money in one fell swoop.
 
‘People taking an income over £100,000 could find themselves in an effective 60% tax bracket due to the reducing personal allowance over that threshold. Higher rate taxpayers will of course pay 40% on any withdrawals from their pension pot or even the additional rate of 45% on some of the fund if their total gross earnings exceeds £150,000.
 
‘Retirement just got a whole lot harder to work out, so speaking to a professional financial adviser will be key in the new world to help consumers fully understand the options that will be available to them.’
 
MGM Advantage has launched an online calculator to help show people how much tax they could pay on lump sum withdrawals from their pensions from April 2015, which can be found at mgmadvantage.co.uk/calculator/