While the new UK pension freedoms introduced in April 2015 provide new beneficial flexibilities for those drawing their UK pensions, retirees also need to carefully consider the tax implications of such flexibilities. As a result of the new UK pension rules, those aged 55 and over can now take as much or as little pension income as desired (if permitted by their pension plans), including taking their entire pension pot as a cash lump sum in one go. While the UK enables retirees to take 25% of their pension pot free of UK tax, the remainder is taxed as income at a persons marginal rate of tax.
Hargreaves Landsdown has projected that the UK Treasury is likely to net an extra £700 million in 2015 as a result of the pension reforms. This is as opposed to the £320 million originally forecast by the government. This means more people will be accessing their pensions at greater levels than originally expected.
While having greater flexibility in deciding when and how to access your UK pension is positive, the projections by Hargreaves Landsdown highlight the importance of taking into consideration your specific retirement objectives and understanding what impact tax could have on a person’s pension income strategy.