Osborne set for pension tax windfall
Savers cashing in under new rules may pay a heavy price, experts tell
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CONFUSION over tax charges could leave savers high and dry in retirement if they take advantage of new rules allowing to cash in their entire pension them pot.
Experts warn that Treasury coffers will be the biggest winner from pension reforms coming into force next year as it rakes in “unnecessary” contributions from savers ignorant of the tax consequences.
They spoke out as it was revealed that annuity rates are falling again, increasing the likelihood that people will opt to raid their pension savings.
The shake-up taking effect in April will allow savers aged 55 and over to take their entire defined contribution (DC, or money purchase) pension pot as a cash lump sum, including 25 per cent tax-free. The remainder will be taxed at
“The Chancellor has effectively engineered a tax windfall from unsuspecting pension investors”
Tom McPhail
their marginal rate, rather than the current 55 per cent charge.
But new research suggests that many of those intending to take their savings in one bulk withdrawal are unaware of the tax implications.
The study, by Hargreaves Lansdown, found that 12 per cent of DC investors will capitalise on the new rules to take all their pension pot as a lump sum. Yet just 38 per cent of those surveyed could accurately state the tax rate they’d pay on cash taken from a medium-sized pension, while a mere 6 per cent could predict the tax charge on a large pension pot.
The tax paid on pension withdrawals could amount to a £1.6bn boost for the government in the first year alone, the firm estimates. The complexity of the reforms will result in “a lot of investors whoe will end up paying unnecessarily large amounts of tax”, warned Tom McPhail, head of pensions research at Hargreaves Lansdown.
“The Chancellor has effectively engineered a tax windfall for the government from unsuspecting pension investors,” he said.
The research was published as new figures showed a fresh decline in the returns paid by annuities. The average annual income paid by a standard annuity on a pot of £50,000 fell by 3 per cent in the three months to the end of September, according to Moneyfacts. It attributed the drop to a “perfect storm” of lower gilt yields and a sharp fall in demand for annuities since the reforms were set out in the Budget.
The decrease is likely to drive more lender accepts every home report),and the admin fee (often charged to close the mortgage in the future). Also, one major lender charges borrowers who wish to use their own solicitor rather than one from their very limited panel. A mortgage broker will work out the best product considering all fees and charges, but also lending criteria as well.
OUT FOR EXIT PENALTIES Rates are at historic lows and borrowers have never had it so good. However, the longer the fixed rate, the longer an early redemption penalty will most likely apply, and this may be as much as 5 per cent of the mortgage people into taking riskier options with their pension pots, rather than opt for the security of annuities.
The pitfalls facing those clude shock tax bills.
Rachel Vahey, an Edinburgh-based independent pensions consultant, said there’s a risk of savers underestimating how much income tax they’ll be charged.
“Once someone has added their withdrawn funds to any other earnings (including the state pension) they could easily be pushed into a higher rate tax bracket and have to pay 40 per cent tax on all or some of their fund.”
Complications with the emergency tax codes being put in place from April will add to the confusion. Many basic rate taxpayers, or even non-taxpayers,
savers balance. If you wish to sell or buy during the product period then this penalty will apply if you don’t meet the lender’s porting criteria at that time. Some lenders offer ten-year fixed rates but can you really guarantee that you won’t sell/move/have kids/divorce/change jobs etc during this period? Shorter product periods can therefore offer greater flexibility. DON’T DWELL ON THE VARIABLE RATE The default standard variable rate (after the “product” period) will vary from lender to lender, but it
in- could unwittingly pay 40 or even per cent on their pension cash.
Even if the code is correct, the tax charge will still take a sizable bite out of the liberated pension cash.
A pension pot worth the full lifetime allowance of £1,250,000 will be liable to almost £408,000 in tax, said Sarah Tory, financial adviser at Shepherd & Wedderburn.
However, the impact on more modest savings could be just as detrimental. Someone retiring with a fund of £50,000 and in receipt of the state pension could pay around £7,000 in tax on their pension cash.
“That’s a rate of 14 per cent. Giving up so much of your pension to the tax man is not something most of us would gladly do,” said Tory. “You may end up is unlikely that you will spend any time on it. Most lenders offer very good new products to their existing borrowers at review time, and your broker should be in touch three months beforehand to reevaluate the situation.
IT RIGHT Many borrowers believe it’s best to switch to a new lender when their current rate expires. However, switching can often incur a number of non-obvious charges as mentioned above. Yes, most “remortgage” packages come with a free survey and free legal work,
45 SCOTLAND’S two big energy suppliers have been named among the worst ranked companies for consumer trust and communications, in a report comparing global brands.
Scottish Power and Scottish & Southern Energy (SSE) each appear in the bottom ten of 120 firms ranked by the perceived simplicity or complexity of their products, services and communications with customers.
SSE “seems to make things more complicated than is necessary”, according to the index, with its agents accused of being “very pushy” and giving “unclear advice”. Scottish Power is simply deemed “untrustworthy”.
All of the big six energy suppliers are near the foot of the table, compiled by Siegel & Gale, while financial services firms also perform poorly. The worst is Royal Bank of Scotland, but Lloyds, Santander, HSBC and Barclays are also singled out by the report, which found that financial services companies have some of the worst levels of consumer trust of the industries featured.
The only exception is First Direct, appearing in the top ten and credited with simple presentation of terms and conditions, 24/7 customer service and easy-to-use ATMs, online and phone banking. JEFF SALWAY paying more tax and having to reclaim some back from the revenue. Given the new changes on death charges, too, this could be a costly mistake should you wish your funds to pass on to your family.”
Large pension lump sums could also compromise entitlements to means tested state benefits or long-term care funding, she added.
The ultimate risk is of pension pots being drained prematurely, leaving savers dependent on the state.
“The reason many people started to save was they wanted a decent income in retirement and didn’t want to be reliant on just the state pension,” said Vahey. “It would be a shame if many, through lack of knowledge, pay too much tax and run out of funds early.” but make sure you fully consider the options available with your current lender, and that your adviser carries out a full remortgage cost comparison l Robin PurdieisdirectorofMOV8 FinancialinEdinburgh
ABOUT THE TERM The main thing that will determine the overall cost over the life of the mortgage is the term – a mortgage over 35 years will cost more than one over 25. However, the most important thing is monthly affordability, so elect a term that makes the payment work for you – you can always overpay or make changes to the term as you go.