Monday, 16 March 2015

Beware of tax if you free up your pension

How much tax will you pay on your pension?

Tax is a crucial consideration with the pension freedoms being launched in April and the latest idea -- cashing in your annuity -- which might arrive in 2016.

The tax penalty of 55% on taking out your money is being removed, but there will still be tax: 25% will be tax free, then you pay income tax at 20%, 40% or 45%, depending on which threshold you smash through.

It's a point which may have been overlooked in the excitement over the cash-in-your-annuity idea.

A typical pension pot of £20,000 to £30,000 buys a very small annuity, perhaps around £25 a week.

However, for many pensioners, that money could be free of tax, because their incomes will be less than the personal allowance, the amount of income you are allowed to have before income tax kicks in.

On the other hand, taking the money as a cash lump sum would push many of them into 20% tax and there's no tax-free element.

People on slightly higher incomes will need to worry about the 40% tax threshold.

So it will be very important to calculate what might happen to your tax bill, even though you might be very unhappy about the size of your annuity.

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