Traditionally, the Easter festival is the oldest and most important festival in the Christian calendar.
The festival has its culmination in Easter Sunday, the day that Jesus was said to have come back to life after being crucified. We typically celebrate Easter Sunday by the giving and receiving of chocolate eggs – and no doubt many of us celebrate with a big bout of indigestion as well after we have over indulged!
Easter Sunday this year falls on the 5th of April which coincidentally, is the last day of the old tax year. So what, you might think! Well from a financial point of view this date is very significant this year – perhaps more so for pensioners than in previous years. It represents the end of the old pensions regulations and the start of the new.
No doubt you will have read all about these forthcoming changes in the national press – and all the stories that have followed predicting a rash of pensioners cashing in their pension pots and going out and buying sports cars or other such luxury items.
New regulations
The new regulations were brought in by Chancellor George Osborne last year, so what do they mean and what will they allow you to do?
Well, essentially, the new regulations mean that those over 55 who are yet to cash in or draw their pensions can effectively treat them a bit like a bank account. No longer will there be a need to buy an annuity as in the old days – you will now, in theory, be able to take all your accumulated cash out in one go and do what you like with it.
So yes, you could buy that sports car, but having saved all your working life why you would want to waste your money like that – but then as the old saying goes there’s no fool like an old fool!
As always with finance, things aren’t always what they seem – and don’t think the tax man is going to let you get away with a large lump of cash without obtaining his ‘pound of flesh’.
Price to pay
If you actually look at the changes closely, then yes you have greater freedom, but if you take all of that freedom there will still be a price to pay. What has not been flagged up in all the excitement is that you cannot take your money tax free. Only the first 25% of the value of your pot can be taken without any tax implications. If you take out more than this then everything over 25% will be taxed at your marginal tax rate. This means you are a higher rate taxpayer at 40%!
And even worse, whether you can take advantage of the new regulations is, in fact, not your choice at all. Yes, you’ve guessed it – those who have the most to lose (being the pension companies with whom your cash is currently invested) will have the final say.
The new regulations did not go as far as making it law and forcing pension companies to allow savers unlimited access to their funds – it is up to each company whether they allow you to do so. If your pension provider says no, and you still want to go ahead, you will be forced to transfer your pension funds to a new provider who will let you follow the new rules, and it will be you that pays the cost of doing this!
So, as is often the case with finance, the changes bring potential freedom, but they could also bring confusion. A word of caution therefore – if you are planning on taking advantage of the change in legislation then it is essential that you take the appropriate financial advice – if you don’t you could make a costly mistake!
