Changes to the way we are allowed to take our pension benefits

It is no longer possible to take retirement benefits (either the tax free cash or an income) from your pension product until your 55th birthday. For many people, the likelihood of being able to retire before 55 is remote but, for those of you who would like to aim for an early retirement or would like to supplement their income as they reduce their working commitments, alternative plans should be made to meet the need before the age of 55.

One way that you could put aside monies to meet a need for additional capital in a tax efficient manner is through an Individual Savings Account (ISA). The ISA allowance has increased to £10,200 per person from the 6th of April 2010 of which £5,100 can be invested into a Cash ISA. You do not pay income tax or capital gains tax on ISA income or gains and the underlying funds grow virtually free from tax. The ISA is very flexible in terms of when and how you choose to use the money but does not benefit from the tax relief at your highest marginal rate you get with pension contributions.

Another change to legislation that is coming into force from the 6th April is the increase in the rate of tax for high earners. Income of over £150,000 per annum will now be taxed at 50%. If you affected by this change or are just over the 40% barrier you may wish to consider ‘salary sacrifice’. Salary sacrifice involves giving up a portion of your salary in return for a commensurate contribution from your employer towards your pension fund. This can benefit both the employer and the employee as the reduction in salary reduces both parties National Insurance liability. Salary sacrifice is not always appropriate and you should seek professional advice before making a decision.

If you would like to talk to an adviser about any of the issues raised in this article click here to request a callback.