Should you buy a "Lamborghini" with your pension fund?
recent budget announcement George Osborne promised individuals more
freedom with their pension savings when they retire. This is
the most drastic change to the retirement system in decades.
Whilst the full details are still to be finalised and incorporated
into the Finance Act, Pensions Minister Steve Webb said "savers
should be free to buy a Lamborghini if they wish".
How realistic is this and are there potential pitfalls as well
as benefits with these changes?
With people living longer the need to provide a regular income
in retirement has not gone away. What these changes allow is
the flexibility in how you produce an income.
With increased flexibility comes choice and some individuals may
decide to "spend it all" but if they do so as the Pension Minister
has stated "if they squander the money they will only have the
state pension to live on".
One drawback of the new rule is that 75% of your pension pot is
still taxed at an individual's highest marginal rate of tax.
So an individual with say £300,000 in a pension fund who
"takes it all out" would be left with approximately £210,000.
A minimum of 25% of the pension fund can still be taken tax free
(£75,000) but the remaining £225,000 would be treated as income by
HMRC for that year resulting in the individual becoming a 45% tax
payer and losing the personal allowance, which disappears on income
Most individuals I suspect would not want to pay the tax
therefore it becomes a delicate balance of how much income is
needed and how can it be taken in the most tax efficient manner
One option is to keep their pension savings invested and simply
take regular drawdown income from their fund or take portions of
the fund as and when required out and invest into other possibly
more tax efficient vehicles. Of course buying an annuity is
still an option.
There is anticipation of a surge in the property market
with a 'Buy to Let' property being a potential attractive
option for pension savings. For the experienced investor with
no immediate need for income, the opportunity to reinvest their
pension savings into a business that qualifies for EIS (Enterprise
Investment Scheme) or SEIS (Seed Enterprise Investment Scheme)
status may seem attractive, as some or all of the tax paid on
withdrawing the pension may be mitigated.
Whilst the freedom to choose how you spend your pension fund is
welcomed, there are still numerous avenues to consider. This
has raised the importance for individuals to seek quality face to
face advice both whilst saving for retirement and even more
importantly now, when they retire to ensure they are fully aware of
their options before coming to any decision.
For further information or advice contact Andrew Jones at
email@example.com or on
07557 351471 or Jayne Williams at firstname.lastname@example.org or
on 07557 351798