Working the pensions system in your favour
lier, around £0.5 billion lower than our March estimate.”
Although there remains a facility to totally encash your pension fund maybe people are taking independent advice and are uncomfortable in accepting the income tax charge.
Based on a fund of £100,000, the net receipt by the client would be £81,300 assuming no other earnings.
If there are other sources of taxable income then the income tax charge rises as more of the fund is being exposed to the 40 per cent tax band.
Instead, one might surmise from the OBR estimates that people are exiting pensions over two years or more to utilise personal allowances and basic rate tax bands in each year and therefore reducing tax liabilities.
This whole pension issue is of course magnified in the case of women – down to the gender savings gap. Retirement savings have historically been loaded on the male, with women taking career breaks to bring up the family.
Once, there was some measure of compensation given that women drew their pension at 60 and men at 65.
But that is being steadily phased out, with the age fixed at 66 for both genders from 2020.
Campaign group Women Against State Pension Inequality have maintained that the manner in which this has been done is unfair on almost 3.5 million women born in the 1950s who have to work six years longer than expected before getting their pension, with little notice or time to make alternative plans.
Most are unable to build up a private pension to bridge the gap.
Encouraged to make pensions savings in their own name, this has happened to some extent, though by nowhere near enough.
Figures from Aegon, released in April, found that the average female pension pot had climbed from £16,700 to £24,900 over the previous two years, but men still had three times as much, with an average £73,600.
For both sexes, but particularly women, they need to work the system.
If you don’t have any earnings – for example, if you don’t work – you can still make gross contributions of up to £3,600 each year to a personal pension, self-invested personal pension, or stakeholder pension, receiving basic rate income tax relief at 20 per cent, so in effect making the real payment £2,880.
Indeed, people often have unused personal allowances in retirement.
These can be utilised by taking income from pension arrangements making the tax efficiency of pensions even greater when used in conjunction with pension freedoms.
Despite many predictions to the contrary, the Chancellor left pensions untouched in his latest Budget.
Tax reliefs remain and should be utilised. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,
based in Solihull. Email: tlaw@eastcotewealth.co.uk
The views expressed in this article should not be construed as financial advice