Since then, there has been much debate about merits of the increased flexibility, perhaps most memorably from Steve Webb, then Minister of State for Pensions, commenting that if pensioners “get a Lamborghini, and end up on the state pension … that is their choice.” Whilst increased ability to make our own choices is usually to be celebrated, this comment highlights the need to carefully consider your circumstances and objectives when making withdrawals.
Investment markets over the past year have highlighted the risk of drawing too much from your pension too soon. As we have found in our research on ‘safe withdrawal rates’, those who have been drawing all of the growth (or more) from their pension over the past decade may now face a nasty surprise if expecting to continue withdrawing similar amounts for the next decade.
Clients are often (rightfully) concerned about this. We believe that such concerns should be addressed with detailed cashflow forecasting and, as a result, having the discipline to maintain a sensible withdrawal strategy throughout the good (and bad) years, with longer term sustainability in mind. After analysing our clients situations and detailing the risks, we often find ourselves encouraging clients to spend more and enjoy their hard earned wealth.
The ability to withdraw up to 25% of your pension tax-free, and the introduction of UFPLS, further complicates the decision regarding how much to withdraw and when. By way of an example1, an immediate withdrawal of £96,350 in the 2018/19 tax year would net just £69,450 after income tax, compared to a possible £81,950 net by drawing the income over the 2018/19 and 2019/20 tax years (equating to a tax saving of £12.500, equating to c13% of the gross withdrawal). As this demonstrates, it is important to structure your income so as to best meet your own financial goals and this has undoubtedly become more complicated with the new pension freedoms.
Many commentators were concerned that improved flexibility to access pension benefits would result in greater withdrawals and this has happened. Whilst greater engagement with pensions should improve your overall finances, you may also wish to consider the next generation, especially as the changes introduced in 2015 also increased the attractiveness of pensions as an estate planning tool. We would therefore only recommend withdrawing funds from your pension after careful consideration of your overall circumstances.
As is often the case in financial planning, increased choice comes with increased risk of things going wrong. We have highlighted some of the possible pitfalls of the increased opportunities from the Pension Freedoms; however, we believe the increased freedoms should be celebrated.
To find out more about your pension and how you can best meet your goals, contact Saunderson House and we will be delighted to help.
1 Assuming no other taxable income, £96,350 withdrawn in the 2018/19 tax year would utilise the Personal Allowance of £11,850 and basic rate income tax band of £34,500 with the rest falling within the higher rate income tax band. By drawing the funds over 2 tax years (£46,350 in 2018/19 and £50,000 in 2019/20), higher rate income tax can be avoided entirely and two personal allowances can be fully utilised.
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