Business News

April 2011

Pensions Just Got Very Exciting

New pension rules which came into force on 6 April allow individuals to

•             Make substantial contributions and save tax at the highest rate and
•             In some cases to draw all that money back out and pay considerably less tax at that time

Once you have a pension income of £20,000 per annum you can withdraw the funds from all your remaining pensions. The new flat rate state pension is expected to be around £8,000 per annum. That means that once you have £12,000 of private pension income then any remaining pension funds can be cashed in.

Take someone who is a 40% taxpayer now and already has a pension fund that will give the £12,000 income shown above. They start a new pension and the figures would work as follows:

Pension contributions	£100,000
Less 40% tax relief	(£40,000)
Net cost of pension	£60,000

At retirement you can draw £25,000 tax free as follows.

Net cost of pension above	£60,000
Tax free cash withdrawn	Tax free cash withdrawn	which leaves a fund of £75,000
Net cash cost of a fund of £75,000	£35,000

Then you can draw out all of the remaining fund (of £75,000) over five years by taking £15,000 pa pension which gives £12,000 pa after tax at 20%.

Cash outlay	£35,000
Cash returned	£60,000	71% profit

So for a client who is a 40% taxpayer now and will be paying 20% tax when they retire a cash outlay of £35,000 will give then a profit of £25,000 over five years. This is purely through the tax savings on pensions and does not involve any investment risk. For clients who are 50% taxpayers now the tax savings are even greater

For clients approaching retirement this can give an immediate boost to their retirement planning. With the new rules allowing clients to put up to £250,000 into pensions in one year and get full tax relief on this the tax benefits of pensions have never been greater.