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What are the hidden consequences of the new pension system?

Little over a month ago, Chancellor George Osborne announced radical new plans to overhaul the pension system in his 2014 Budget speech, potentially leading to a “pension revolution” over how people will fund their retirement.

As the new pension system will give retirees the flexibility to do whatever they want with their pension fund, many have already speculated on what this will actually mean.

It is hoped this will provide those who are retiring with much more flexibility over what they can do with their pension savings, and that people will get better value for money on their hard earned pension savings.

However, some people claimed that the new system is flawed and there are plenty of pitfalls in the proposals.

A few of these ‘pitfalls’ are listed below:

1. Spend your life savings on a Ferrari



One concern that has been widely debated is that pensioners could take advantage of the ability to withdraw their entire pension fund as a lump sum and spend it frivolously.

For example, there’s nothing to stop somebody withdrawing an entire pension fund worth over £200,000 and spending it all on a shiny new Ferrari!

However, those who decide to spend their pension fund so frivolously will not be able to turn to it when money is tight in retirement.

Additionally, recent research into Australian retirees who already have full access to their pension fund shows that most people are actually pretty careful with their pension savings and use it to invest, rather than to blow on holidays and expensive cars.



2. House prices could rocket due to pensioners entering the buy-to-let market



Another theory is that pensioners could decide to invest their pension funds into buy-to-let properties, in-turn causing house prices to rocket due to an increased demand.

This could provide pensioners with an alternative retirement fund through rental income in addition to the potential of the sell on value of their investment.

However, there are still some holes in this theory. For example, the average pension pot is only £17,700 – not nearly enough to buy a house!
Pensioners could decide to take a mortgage on, but this comes with considerable risk, especially if they don’t have a guaranteed income to carry on making the mortgage repayments.



3. The taxman could come knocking



So, you’re due to retire and you want to take your entire pension savings in one go? Well it might be worth mentioning that after you take an initial 25% of your fund as a tax-free lump sum, the rest would be classed as a ‘taxable income’.

This means you’ll be able to withdraw the first 25% of your fund without paying any tax, but everything afterwards will be taxed at your marginal rate. Essentially, you could find a large proportion of your money being taxed at a rate as high as 40%.

One way of avoiding these taxes is to take 25% of your pension fund as a tax-free lump sum, and then take the rest in smaller chunks on an annual basis.

Additionally, you still have the option of buying an annuity, but the best thing you can do is contact a financial adviser for advice on how to withdraw your money in the most tax-efficient manner.



4. The value for money of Annuities could go up or down



As annuities will no longer be the only option for many, this could affect the market in one of two ways.

The first way is that annuity providers cannot offer the rates they currently offer due to decreased demand. However, some might decide they need to be more competitive, meaning they offer better rates.

At the moment there is no way of telling how annuities will be affected; only time will tell!



5. The government collect more inheritance tax when people die



As less people are expected to take annuities, it is likely that more people will leave behind assets ranging from cash to property.

However, whereas the taxman could not get his hands on an annuity, under current regulations they’re allowed to take a percentage of any assets left in a will that total more than £325,000.

This could mean that in the future, inheritance tax will become a bigger issue in the eyes of the public as more people leave valuable assets behind for their family, only for the government to take a slice of the assets.



Need Financial Advice on your Pension?



If you are unsure on the best way to invest your pension fund or how to withdraw it in the most tax-efficient manner, then it could be a good idea to get expert financial advice.

You can ask a question to one of our expert financial advisers online or by calling 0800 092 1245.






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