Tax threat to take 10 years’ funds from pension pots
Did George Osborne ever mention the threat of a massive tax bill for people who are planning to draw a sizeable amount of money from their pension pots?
This Writer doesn’t recall any such warning – but the threat is real, all the same, and apparently one in 10 of us may discover it when we try to raid our Self-Invested Personal Pensions.
We should be clear that this blog places no blame on anyone for wanting early access to their pension money, rather than using it as intended – to be paid out over the course of their retirement. Times have been hard, due to five years of Conservative and Liberal Democrat misrule; of course people will want access to money that is theirs, if they can get it.
According to the BBC, this year’s pension changes mean:
- People aged 55 and over can withdraw any amount from a Defined Contribution (DC) scheme, subject to income tax
- Tax changes make it easier to pass pension savings on to descendants
- Many people with Defined Benefits (DB) schemes will be allowed to transfer to DC plans
- All retirees will have access to free guidance from the government’s Pension Wise service
- Existing annuity holders are unaffected for the time being, but there are plans for them to be able to sell their annuity
If George Osborne said anything about how it would be taxed, This Writer hasn’t seen it – but the Treasury says it has consistently stated that 25 per cent of people’s pensions is tax free and the rest is taxed at the marginal rate.
What does this mean?
According to SIPP Club, it means the more money you take out, the more you give to the government – and to George Osborne’s Treasury. What a nice present for him, on the eve of an election!
The first 25 per cent of year pension is tax free. With the rest taxed at the marginal rate, we see the following contributions to the Treasury:
Up to £10,600 – no contribution.
£10,601-£42,385 – 20 per cent (one-fifth of the total withdrawn).
£42,386-£150,000 – 40 per cent (two-fifths of the total withdrawn).
More than £150,000 – 45 per cent (nine-twentieths of the total withdrawn).
Put simply, it will be taxed in exactly the same way as any normal income – from employment, for example.
In addition, if you take out your pension pot, this blog has been told it will reduce your entitlement to any benefits once you retire. Any further information on this would be welcome.
As Facebook commenter Julia Smith pointed out: “It’s the equivalent of having paid into [your personal pension] for 10 years [of your working life] – for nothing!
“[George Osborne] must be wringing his hands in glee.”
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Yes – it was mentioned if not by Osborne certainly by Pensions Minister Webb and has been the subject of comment in many articles particularly in the money and fınancıal papers dealıng wıth pensıons. It will no doubt also feature in the advise given by the CAB and other recognised advisory bodies. It ıs sımply the tax that would be payable over the longer term had ıt not been drawn down. Anybody contemplatıng makıng a drawdown ıs recommended to thoroughly check the full ımplıcatıons before doıng so.
Is it really?
The CAB is training its staff for this new venture in association with the Government (and funded by the govt.). This is the Pension Wise scheme found on the Government website. However, the CAB can and will only provide guidance on how to go to about getting financial advice while not actually giving any financial advice (that remains beyond our remit). Contacting your local bureau will get you an initial face-to-face session (or phone session) to organise a dedicated interview at which your basic options can be discussed. At no time can the CAB give direct financial advice about pensions.
Mike & All it gets better
I’ve been warning people before that this is not being done for US.
Its being done for THEM.
https://welfaretales.wordpress.com/2015/04/06/retirees-who-raid-pensions-will-be-blocked-from-state-benefits
Changes are to boost, financial industry, and benifit no one else.
But a private pension already affects benefits. If you receive a pp you will rarely qualify for any benefits other than the basic state pension and/or state second pension. Over 16k disqualifies anyone from pension credit/housing and council tax benefit. And so it should. Benefits are for those in need, not those with substantial funds available.
Johnm,
1. The issue is fairness. NO flagging by the advocates of this plan of the downsides, though they would have known of the difficulties at the time of coming out with this – I know as I was a civil servant with knowledge of the policy side, so this would have been High up on the advice given out.
2. Even if with a second pension, you are disqualified for the full state, you should as you contributed all your WORKING life to the pot be able to benifit from it – it is a style of insurance, and you have no option [I am sure the ConMen have ideas to change that], but to contribute.
3. Means testing is means testing, to be blunt – if a person contributed, and wasted the lot, for the state to knowingly take the money, and then [even if the person was a fool for what they did with the pot] deny them. There is only one word that describes the states/gov’s actions.
Fraud.
it is irresponsible to be encouraged to spend your pension on rubbish anyway. I thought it was a swindle and now its an even bigger swindle. Looks like the Tories are not even for the top 1% any more. More like the top 0.00005%
Max Keiser has pointed out that the City of London bankers could be looking to cash in on all the freshly freed pension pots. To me it seems to have several pro’s for Osbourne:
1. Feel good factor prior to GE
2. Bankers can sell dodgy financial products to unwitting pensioners
3. Wealthier or reckless pensioners can fuel the housing bubble with BTL mortgages etc
4. Increased income tax due to points Mike mentions above^^
5. Most importantly: Nothing Osbourne does benefits the 99%, unless it helps divide the population and fuel the class war.
It WAS mentioned. But the full implications weren’t -as you might expect. I worked in the industry many years ago and so I can see just how despicable and cynical this is. Osborne is, as Carney said, a “huckster”. This move borders on criminal irresponsibility.
The whole idea was to get people spending money now rather than in the future so georgie boy could claim a financial success, not that his complete failure has stopped him doing that anyway.
Hi all
If I were to take out say £10k would this affect my benefits?
Just wondering
Thanks
I would obtain advice from CAB or the government advice line before you do anything.
For a start, anyone currently claiming benefits is only allowed a certain level of savings, so if you took out 10,000 you would be over the limit (which I think is £6000). You would then have your benefits reduced even stopped until you reach the limit again, and you would not be allowed to spend this money on just anything; there are rules pertaining to the type of thing you would be allowed to spend the money on, and you’d have to keep receipts and records to prove where you spent that money. You also aren’t even allowed to accept a gift of money when on benefits, so again it would do well to talk to a specialist to find out the exact rules on this before you go ahead, and also check with a DWP decision maker.
If it is likely in the future that you will need to claim pension credit, housing benefit and council tax benefit (depending on your local council tax relief), then spending any amount of your pension now would reduce the amount you are paid out or could claim later, which the government would take as ‘deprivation of income’, so they would treat your case as if you still had that money, which could lead to extreme hardship if you have to find rent/council tax on a lesser state pension.
The only people who are really going to benefit from this are those who own their own homes and would receive a full state pension regardless of any other assets and income. Nevertheless, it could still leave some in a vulnerable position as the state pension isn’t exactly a modest income!
Very interesting – although I think you mistyped your last point. The state pension is extremely modest – if not minimal.
Hi thanks for that (bang goes my lamborgini then -( )
Other benefit-related sites on social media have been pointing out that if you take, say, £10,000 from your pension pot and don’t use it in a manner the DWP deem suitable it could affect your ability to apply for any state pension. The £10,000 would be considered part of your income and means-tested as such even long after it’s spent. This would include paying for anything needed in your old age or passing the cash on to children. Be very careful.
Anyone thinking about using their pots to for buy-to-let need to be wary too. Housing stock has to increase at some point with the inevitable affect of lowering the income from such BTL. Even if housing stock is not increased, wages will not keep up with private rents and this govt. will not stand for an increasing Housing Benefit budget, so there will be more welfare cuts there. So, even if you could live happily on the proceeds now the same may not be true in a couple of years from now.
Took mine last year as it was classed as a trivial amount, not so trivial as not to be entirely tax free. Reason I cashed it in was because my 20k was only worth a pension of £750 per year. Greedy bankers were about to stitch me up yet again and the revenue even took an amount towards my student loan from yesteryears gone by. Never mind used it to mopp up the short fall in my mortgage now I can die peaceful in the knowledge that I “did the right thing” for the hard working tax payer who gets up at the crack of dawn to trudge through the snow to his zero hours minimum wage job.
Mike, a point worth mentioning with respect to Osborne is that he collects tax it’s used to fund tax cuts for the rich and not for the good of the whole nation.
A Point to bear in mnd is something my sister said – used to work in the industry. “For every Pound” you take out you reduce future payments by tens [10s] or even hundreds of pounds from the monthly/yearly pay out.
Beware of false economies.
With the caveate that what tommaz jay did in his own case appears to be quite correct for himself.
Each persons situation will be unique and will require lots of advice and thought – myself? Not going there. I have no intention of willingly helping this plot.
This government even wants to harm pensioners, many of who vote Conservative.