Posted on: 25th Jul 2014
The first thing many people think about retiring is spending money. They want to know what they can spend money on.. whether it’s holidays, dinners out or luxury cars.
And now that Chancellor George Osborne has of course announced details of a new scheme which will let hundreds of thousands of people who retire on privateeach year benefit from greater flexibility there are more and more people rubbing their hands with glee and wondering about that flash sports car.
Before you get carried away, however, a word of warning.
With great flexibility comes greater responsibility.. and it seems a higher tax bill. Yes the problem with this new scheme is that people might have to pay more tax unless they stagger withdrawals. So any ideas of buying that lamborghini (as suggested by Lib Dem minister Steve Webb) have been sincerely nipped in the bud.
The reality says the Office For National Statistics is that you’d end up spending more than £150,000 on the car and another £50000 plus in tax. When a sum is withdrawn from apot, it will incur income tax and be treated by the tax-man as income for one year.
Which put simply means that it acts like a normal salary. Any lump sum withdrawal can therefore take you way above the 45 % tax band.
It’s believed that the average pension for those aged 55-64 is about £77,000. That would incur about £12,0000 in tax.
And those with larger pots are looking at higher tax than that. Maybe 60%.
So can I spend my pension pot or not?
Well yes, but don’t do it. While the changes to pensions will allow people to drive off with all of theirsavings our advice is don’t take it out in one go. If you are sensible and keep your smaller more sensible then you’ll curb the tax.
In the long term the Government is trying to encourage saving. And while the reforms are intended to allow pensioners to vary the level of income they receive depending on their circumstances we have to ask, why will people to save responsibly for their retirement if they do not believe they will get value for money from their savings when they come to access them?
If you can afford it, buy yourself a lamborghini and enjoy. Why not? For the rest of you best save for the future that you want and stop the tax man taking a chunk out of your well earned retirement pot.