Taking advantage of the new pension reforms? Careful you don’t pay tax you don’t need to

20th August 2014 by John Lappin

A recent conversation between Mindful Money and Standard Life’s head of customer affairs Julie Hutchison saw her suggesting that the impact of income tax and pensions is becoming a lot more important and investors more aware. This will certainly be the case next year when changes to the retirement income rules, announced in the last budget, fully come into effect.

While people have been offered all sorts of ways to take their hard-saved pension income – no-one will have to annuitise if they don’t want to and it’s definite this time – people could face an increased tax bill, if they are not careful. It doesn’t take a lot. It takes enough pension income to take you above your current income tax band. It counts along with other income you may have perhaps from working part time or from other pensions say for example a local Government scheme.

So those who want to make that Lamborghini purchase may need to budget for handing quite a bit over the taxman too.

Ms Hutchison says that her firm and indeed her blog are attracting a lot more queries as a result, as pension investors begin to grapple with the issue of how they may take their pension income in light of the new reforms. Actually if people are grappling with the issue, then actually they are not the problem group. It is those who aren’t aware or have a fuzzy understanding.

Standard Life is considering ways in which it might warn those who could face an increased tax bill – if they do decide to take out a lot of their money.

Prior to this, she says, most of those who faced issues surrounding their pension income and income tax were usually in the flexible version of income drawdown. They would usually be in receipt of regulated financial advice. These reforms extend much further than this and much further down the income scale.

The Government, the financial regulator and various non-profit organisations such as the Pension Advisory Service and semi state organisations such as the Money Advice Service are working out how to deliver it. Some fully regulated advisers are cynical. Yet while this is being devised, it makes it all rather important for people with a reasonable amount of pension to realise that spreading it out over several years may mean they don’t push their income over their marginal rate. Anyway this is much better explained in Julie’s blog don’t sleep walk into a tax bill with your pension. We highly recommended it, certainly if you are not sure of your position and are due to make some very important retirement income decisions soon.

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