Pension Freedom Rules

The issues surrounding pension freedom rules can be very complicated and difficult to understand. However, the problem can lie with the fact that if you have a little knowledge you may believe you already know what you need in order to make a decision, whereas the reality could be very different.

Obvious though this may sound “you don’t know what you don’t know”.

That is why it is vital to seek professional help and make sure you have full knowledge of pension freedom rules. An obvious area that frequently gets missed by the layperson is the interaction of state benefits or income tax.

Certain state benefits are means tested and could be affected by either a cash sum released or income. The problem is knowing which ones. Professional advisors are obligated to have a very thorough understanding of the interaction of state benefits and pension freedom rules. It is impossible to be 100% sure as even state benefits vary with individual circumstances and frequently the ultimate decision will be made at the local benefits agency. However, an advisor should be able to provide a robust indication of how things work.

For example, someone in receipt of Council Tax Benefit is normally allowed to have savings of up to £16,000 without affecting the amount of benefits received. This means, if you don’t already have any savings and want to take a cash sum from your pension of £16,000, pension release rules indicate your Council Tax benefit would not be affected.

If income is taken from a pension early, this could also affect Council Tax Benefit, however, usually other state benefits are being taken as well and it is the interaction of these that could affect the exact way. Because of this complication it is more difficult for pension unlocking rules to be precise and it would always be advisable to go direct to the local benefits agency first, before actually releasing and funds early, and establish exactly how benefits could be affected.

The issue with income tax surrounds the fact that any income taken from a pension, or withdrawals in excess of the 25% that is tax free, is classed as earned income. As a result it would be added to any other income received and taxed accordingly, depending upon the tax rules, which can change, and your circumstances at the time. Pension freedom rules ensure that if you want to take income or withdrawals from your pension then the professional advisor should be able to inform you whether the amount of income you take will push you from being a basic rate tax payer to being a higher rate tax payer.

As can be seen, pension freedom rules are complicated and deciding whether taking money from your pension early is not necessarily as simple as you might think at first glance. Always seek professional help, if only to point out the main issues that concern your specific situation.