“Bank Style” Pension Accounts Have Now Officially Arrived in the UK
Pension bank accounts have officially arrived! Reminiscent of a current account, your pension can now be drawn down like an ATM machine. The new pension accounts have been OK’ed by at least five of the UK’s monster insurers.
Britain’s largest insurance companies are going to let their customers use their pension like a bank account from April 6th, 2015 when the new pension freedoms kick in.
Insurance monoliths such as Aegon, Aviva, Phoenix, Scottish Widows and Standard Life confirmed to the Daily Telegraph in the UK that they will allow over 55’s to dip into their pensions as and when they like, taking their 25% tax-free lump sum as they go.
Notable absentees were Friends Life who are still exploring the options available. Obviously, they are keeping their cards close to their chest, but in typical prison dilemma’s style, almost all the companies are allowing savers to convert their pension into an ATM machine. Well done, HMRC.
Whilst this will be a temporary boost to the economy, it will do a disservice to people who need the most advice; those will smaller pensions who maybe tempted to cash their pensions in rather than wait and allow time for compound growth to increase their pensions; whilst higher income earners are likely to benefit the most.
Sophisticated investors can leverage up and take calculated risks or retire abroad and minimise their tax bill, even reducing it to 2.5% or even zero in some cases.
Presently, most pension schemes don’t allow people to take small amounts of money, and the newly retired are forced to take their 25% tax-free lump sum within 18 months of retiring.
However, in George Osborne’s budget in March last year, the Chancellor announced a set of changes which marked a massive U-turn to government policy, allowing pensioners much greater freedom over how they draw their pension in retirement.
Unfortunately, surveys have suggested that most UK residents have no idea how it will be taxed in retirement, with many not realizing they will be taxed at their highest marginal tax rate on any cash lump sums or drawdown they take.
“Bank Account Style” Pensions are Here to Stay
Many won’t realize that it is the pension member’s duty to inform the pension trustees and pension trusts will automatically put pensioners onto the “emergency tax” code and pensioners may have to wait a year or more and file to have their taxed returned.
How to Avoid UK Income Tax on Your Pension Account
The only way to really avoid the income tax is to retire outside the UK. In fact, there are many reasons to retire in somewhere like France for inheritance tax reasons as well. If you retire offshore, you can export your pension to a Qualifying Recognized Overseas Pension Scheme (QROPS) which will allow you to avoid all UK taxes on your pension as long as you reside abroad.