Tax-free pension

If my understanding of the proposed new pension options is correct, it will be possible to draw the whole of a personal pension fund, tax free.

The recent Budget was the best news for pensioners – ever.  And remember – everyone is a pensioner, either now or in the future.

One of the major dis-incentives for investing in pensions, or in taking the benefits from an existing pension, is the requirement to buy an annuity.  This wasn’t so bad when a pension pot of £100,000 would buy an annuity of £15,000, but in recent years this has fallen to less than £5,000.  There have been alternatives in recent years but many people have been left with the prospect of buying an annuity at some point – handing over pension savings to an Insurance company in return for a guaranteed income for the rest of your life.  The plus side to the annuity is that, for however long you live, you will have an income.  The downside is that you have to live a very long time to enjoy the benefit of anything near the full value of the pension fund.

The immediate relaxing of the drawdown rules (an alternative to annuities) is a significant benefit, but the proposal that, from April 2015, it will be possible to en-cash the whole of a pension fund, to be taxed at your marginal rate of tax, is something more than significant.

If this means what it says it is similar to the existing rule that applies to drawing a postponed State pension, which is taxed at the marginal rate of tax arising on other income.  In circumstances where other income can be controlled (i.e. where there is no automatic income stream from an employment or pension arrangement) so that, for at least one year, taxable income can be less than the personal allowance – the marginal rate of tax for that year is Nil.  If the deferred State pension is drawn in that year, the rate of tax applied to it is Nil.  My understanding is that the proposed tax rules for en-cashing a personal pension fund are the same. – Enjoy!