Read how we helped one of our clients save over £200,000 in tax!
Pension rules allow those aged 55 and over to withdraw a tax free lump sum from their pension funds, which can be an enormous benefit, providing invaluable flexibility.
However, care must be taken and advice should be sought to ensure that you don't end up paying tax when you could avoid it.
A client of ours who lives in the South West, aged 55, has built up a pension fund of about £1,220,000. He has recently married and wants to move to a larger property. He proposed to help fund this by using his pension.
However, by crystallising the maximum possible, he would more than use up his lifetime allowance (LTA), which currently stands at £1,030,000 (11.06.18) and the excess of £190,000 would immediately be taxed at 55% costing him £104,500.
If taken as a lump sum, this would have a massive negative impact on his retirement plans and ambitions. He estimates that he would need an annual income of £60,000 a year after tax. To achieve this without taking full advantage of available tax benefits and allowances would be highly expensive. In fact, he would need a gross income of £80,600 a year, of which £26,600 would go straight to the taxman.
Our advice to him is to consider looking at alternative methods to fund the property purchase, through means such as mortgage or equity release.
By leaving the pension pot untouched, he would immediately save his £104,500 tax bill. He could then use phased drawdown to provide a tax free income for five years.
Using phased drawdown you can target a specific level of net 'income' which consists of part tax free lump sum and part income (less tax at your highest rate). He could use this method to provide himself with his required income tax-free for five years. Over that period, he would save himself no less than £207,500 in tax. Of course, neither a mortgage or equity release are free, but they would cost him much less than £207,500.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual's appetite for risk means that the advice for one person may not be the same for everyone. The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding at June 208.