Be careful about cashing in pension pots

Under the new pension rules announced in the last Budget, which come into effect in April 2015, 25% of any previously untouched pension pots will be available to be cashed in tax free, with the remainder being subject to Income Tax. Surveys suggest that many see this as a windfall – and it could certainly be one for the Chancellor - yet there could be a nasty surprise for those planning to entirely liquidate their pension pots.

Under current proposals emergency tax codes will be used for many to assess how much tax should be deducted from any pension withdrawals. This will likely lead to many basic-rate taxpayers, or even non-taxpayers, seeing deductions at 40%, or even 45%.

As many of these will take no professional advice whatsoever, the first they will know of this tax charge is when a far lower payment than they were expecting lands in their bank account. Those planning for an around-the-world cruise next year could therefore end-up with the budget for a river cruise instead.

Whilst the implementation of Workplace Pensions will ensure that the vast majority of employees will have pensions moving forward, this will do little to plug the ‘pension’s black hole’ that exists in the United Kingdom if pension funds are quickly blown. Pressure is therefore mounting on the Government to implement some basic safeguards to ensure pensions are used to provide a liveable income stream in retirement not just a ‘once in a lifetime’ holiday.

To find out more about the new pension rules, download our guide here.

Important information

This article is not advice to invest or to use our services. Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change. Investments can go down as well as up.

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