You can only spend it once, so think twice
Understand tax rules and transaction costs before withdrawing pension funds to secure your dream future, says Ruth Allen
T HE new pension rules which have recently come into force have been the object of a number of wild interpretations and misunderstandings as to what they are all about.
“One of the most common mistakes is a crucial one,” says Andrew Singleton of Money Advice & Planning Ltd. “Many people are under the illusion that they can take out as much as they want of their pension – and pay no tax on it! If only.
“Another common illusion that many people have is that financial advisers have very little to do – they only need to sign something off and pick up their fee for it. Once again, if only! What a lot of people don’t appreciate is the pressures of compliance put on advisers by the regulator, the Financial Conduct Authority (FCA). It does not tell advisers what it considers to be ‘best practice’. Instead, it sits on the sidelines and leaves it to advisers to develop what they think is ‘best practice’. The problem is the advisers can then be hit hard later on for not following FCA rules published after the event. Crazy, I know.
“I am the first to admit that the recent Pensions Review was necessary, as a lot of sales people were persuading clients to come out of good occupational schemes and into personal pensions, thus losing valuable employers’ contributions. Notice I said sales people – not advisers. The main problem with the Pensions Review was that it didn’t look at any details and bundled everything into one. I myself had a client who told me she wanted out of her occupational scheme – I spent a fair amount of time trying to dissuade her, but to no effect. She was then classified as an ‘insistent client’, one who ignores advice and tells the adviser exactly what they want. The Pensions Review ignored issues like this. My client, by the way, was one of the first to complain and get compensation!
“As a result of things like this in the past, advisers are now extremely wary of classifying anyone as an ‘insistent client’; instead they have to go into more detail and get more disclaimers before they can ‘sign off’ withdrawals from a pension for non-standard purposes. This means, inevitably, that there is considerably more paperwork involved. As a result this will impact on costs, and so advisers need to charge more for what many people will regard as a routine thing. Unfortunately, there is no such thing as routine.
“When going over a client’s finances now, where someone is looking to withdraw money from their pension pot, an adviser needs to make clients aware that withdrawing such money is seen as a ‘deprivation of wealth’ which will also affect any future claim to benefits.
“When you take money out of your pension, for whatever reason, but still plan to pay regular contributions into it, your contributions are now limited to £10,000 a year, reduced from £40,000. A person also needs to pay tax at their highest rate, and when you bear in mind that this starts at £42,465 – personal allowances of £10,600 plus basic rate band of £31,865 – it won’t take too much to get into 40 per cent tax.
“Hopefully it is evident that there is a lot more involved than merely taking money out to pay a mortgage or do some home improvements. It is all much more complex than it first appears. A great deal of thought has to go into how much you take out, and when. The old adage is true – you can only spend it once, so think twice.”