The Government's proposed pension rules and tax changes should give far more freedom to savers but with great power comes great responsibility and we should all take pains to ensure we get the very best from our investments.
“The new rules are due to come into force on 6 April and before everyone dashes to withdraw their pension savings they should think long and hard about what they want the money for and what their alternatives are,” says Russ Mould, AJ Bell Investment Director. “Savers should also resist the temptation to get involved with any get-rich-quick schemes which promise returns from unusual-looking investments – if it looks too good to be true, it usually is.”
A well-planned, tax-efficient pension portfolio could go a long way to keeping us all in the style to which we are accustomed after our retirement and savers may do well to consider the following five pointers:
- If you do want to withdraw cash from your pension, draw up a plan so you are sure you know what to do with it. There is no point in taking the cash out of your Self-Invested Personal Pension (SIPP) and then sticking it in the bank, as interest income will then be taxed.
- Make the most of the new rules. There remains a chance that annual contribution thresholds or the tax reliefs on offer continue to decline, and that the new freedoms are revised, so savers should make the most of their yearly limits and any unused reliefs from prior years if they can.
- Be aware of the tax advantages available. You can bank £11,000 of capital gains in a Dealing Account before you have to pay tax while higher and additional-rate taxpayers could use ISAs and SIPPs in combination to shelter income and boost investment returns. Savers can time any withdrawals from their SIPP – from say March to after 6 April – to avoid triggering any unnecessary tax payments.
- Your pension or SIPP could now be a great way to plan for inheritance tax. Any contributions made by higher or additional rate taxpayers still attract 40% or 45% relief yet any bequests will not see these tax-breaks cancelled out by 40% income tax, if you die before 75, or the assets are passed on and kept in a pension.
- Beware of products that are sold rather than bought. Very few of us need exposure to bamboo forests or Ukrainian farmland. If it does not fit with your strategy do not touch it.