Why this pension consultant is now making an extra pension contribution

The proposed new freedoms in the Budget to withdraw unlimited funds from pensions is a game changer for many, but particularly those like me nearing retirement. It is the opportunity to defer income for a few years avoiding 42% tax and NI and take the fund out when needed as income at an effective rate of 15%. Not a bad return.

By way of example, £10,000 of income can be taken as income resulting in an immediate net payment of £5,800 (after 40% tax and NI). Or this could be used as a pension contribution avoiding all immediate tax charges. When employment income has ceased it should not be too difficult to arrange matters such that this fund is drawn during a year when basic rate tax only is paid. Then the £10,000 is paid £2,500 tax free, £7,500 taxable at 20%, net result £8,500. A 46% return! Any growth on the funds in the tax free environment of the pension only adds to the benefit.

With the big increase in ISA allowances allowing couples to invest £30,000 a year, canny investors will be able to top up existing ISAs to generate substantial tax free income, and many couples will be able to keep the taxable element of their joint incomes income permanently in the basic rate tax band.

Pensions have been the subject of much criticism and for many lost their appeal. The new rules will make them once again very attractive tax planning vehicles and I for one will be taking full advantage whilst it lasts.

 

Simon Nicol

Pension Director

 

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