Members of the UK200Group of independent accountancy and law firms have today commented on the introduction of new pension freedoms.

On Monday (6 April 2015) thousands of savers over the age of 55 were granted new powers to access their entire pension pot for the first time.

Under the new rules, individuals over the age of 55 can now draw down up to 25 per cent of their pension savings tax-free and can withdraw the other 75 per cent at their marginal income tax rate.

In the run up to the new pension freedoms there has been a long debate about whether these new changes could lead to people mismanaging their finances and losing their financial security in old age, by squandering their pension pot.

David Whiscombe, director of tax at UK200Group member firm BKL, said:

“However tempting that prospect may seem, it’s not a decision to be taken lightly. Quite apart from the strong likelihood of battalions of dubious “financial advisers” picking up the scent of gullible investors with new-found wealth, like wasps at a picnic, there are tax issues to consider. They are three-fold.

“Firstly, 75 per cent of the amount withdrawn will itself be subjected to income tax. And, of course, if a large sump sum is drawn out it is likely that all or most of it will be taxed at the very highest rate of income tax. 

“Secondly, should you choose to invest all or part of the lump sum (rumour has it that many will be looking at buy-to-let property), the income and gains arising from the investment will be fully chargeable to tax: contrast that with tax-free growth in a pension fund. 

“Thirdly, when the inevitable happens, any value represented by the investment will form part of your estate for inheritance tax (IHT) purposes: again, to be contrasted with the scope for passing the benefit of a pension fund free of IHT. 

“We don’t say that drawing out the whole fund will never be the right thing to do.  But it warrants a great degree of careful consideration.”

Jonathan Russell, partner at UK200Group member firm ReesRussell, said:

“Many are disillusioned with the performance of their pensions and while pension companies go on about the tax advantages, they keep quiet about their charges and in many cases poor performance.

“Many will take the new freedom over their funds to take control of their own investment management, and manage their tax liabilities.

“Yes some may draw out their pensions to spend and yes the Government will make a nice extra tax injection, but the time has come for the pensions industry to earn its respect and create its income by good performance, not by mediocrity propped up by tax incentives. “

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Established in 1986, UK200Group is the leading mutual professional association in the UK with some 150 offices of quality-assured member accountancy and lawyer firms throughout the UK totalling over 550 partners, 150,000 business clients and global links in over 50 countries. UK200Group provide services and products that are designed to enhance the business performance of its members.  Telephone 01252 401050, email admin@uk200group.co.uk or visit www.uk200group.co.uk 

Disclaimer:

UK200Group is an association of separate and independently owned and managed accountancy firms and lawyer firms. UK200Group does not provide client services and it does not accept responsibility or liability for the acts or omissions of its members.  Likewise, the members of UK200Group are separate and independent legal entities, and as such each has no responsibility or liability for the acts or omissions of other members.

 

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