New pensions freedoms: Catch 55?
It was my birthday last week. Nothing unusual in that; it seems to come round every year. The thing is that I attained the age of 55 years. Apart from the fact that this is barely credible when you see me, this would not generally be considered to be a 'significant' birthday. And yet, with the changes to the laws relating how one can access pensions savings taking effect from 6th April this year, reaching age 55 has suddenly taken on a whole new significance.
I have a sense of déjà vu here. When I hit 50 in 2010 I had a three week window to access my pensions savings before the minimum retirement age was raised to 55. For reasons that I won't bore you with I decided to put an additional lump sum into to my pension plan with the intention of transferring to a drawdown policy and extracting 25% of the fund as a tax-free cash sum. As I received 40% tax relief on the contribution, this would result in a larger sum that I could use for other purposes. This worked a treat and remainder of the fund has remained untouched, as I haven't needed the income.
With that transaction there appeared to be little downside, so it is now tempting to pile money into my non-drawdown plan before the end of this tax year (5th April 2015) in order to get the 40% tax relief, and then take advantage of the new flexibility to take it out again after 5th April.
As I'm currently building up my new independent trustee business, I'm likely to be able to keep my income below the higher rate tax threshold, so I will have gained due to the differential between the tax relief gained on the contribution, and the income tax due on any amount above 25% of the fund that I withdraw after 5th April.
In principle this seems like a no-brainer. There is a problem though. If I take out more than 25% of the fund, I will limit my ability to pay further pensions contributions to £10k pa compared to the current £40k limit. At this stage in my business this is no threat, but do I really want to impose this restriction on myself? In addition, if the amount that I withdraw pushes my taxable income above the higher rate tax threshold, I'll be liable to 40% tax -reducing the advantage that I thought that I was gaining.
With the election looming, and higher rate tax relief being eyed as a potential target, this might be my last chance to get 40% relief on a large lump sum contribution. On the other hand, I might be falling into a trap where I won't be able to save as much as I need in a tax-efficient manner if I go for the short term opportunity.