All of us dream of a comfortable life after retiring, yet very few know when they can access their retirement savings or the tax implications involved.
Government statistics show fewer than 6% of people over the age of 55 accessed their retirement savings early since pension freedoms were introduced in 2015.
That suggests there is either widespread prudence or ignorance given that the Office for National Statistics claimed there were almost 20m over-55s in 2017.
These freedoms offer over-55s more choice when it comes to accessing their retirement savings, and have increased in popularity over the last 12 months.
Various options are out there for people over the age of 55, and there are tax implications to weigh up before you consider raiding your savings.
Tax on accessing your pension at 55
Pension freedoms provide people nearing retirement with options to withdraw all or part of their pension from the age of 55.
Should you wish to withdraw your entire pension pot in one lump sum, the first 25% will be tax-free with the remainder taxed at your marginal rate of income tax.
Another option is to access your retirement savings in chunks, with 25% of each chunk being tax-free and the rest being subject to income tax.
The Government offers free guidance for over-55s through its Pension Wise initiative. Alternatively, speak to a financial adviser or one of our experts.
Pensions annual allowance in 2019/20
Every person in the UK can save up to £40,000 into their pension in 2018/19. This is known as the pensions annual allowance.
This is a key threshold to bear in mind as payments into your pension that exceed this will be subject to income tax at the highest rate you pay.
Any unused allowances from the previous three years can be carried forward if you were a member of a pension scheme in these years.
If you earn more than £150,000 a year, this £40,000 annual allowance tapers by £1 for every £2 – potentially reducing the allowance down to £10,000 a year.
Tax on the state pension
If you are over the age of 65, you will probably be receiving your state pension from all those national insurance contributions you’ve made over the years.
For many, that does not necessarily represent official retirement and more savers are working on past the state pension age.
In 2017, there were around 1.1m over-65s who received a wage from some form of employment alongside weekly income from the state pension.
If you fall into that bracket, you should be aware of being nudged into the higher-rate income tax threshold with income of more than £50,000 a year.
Any combined income from earnings and your state pension would be taxed at 40% if it exceeds £50,000 – double the 20% tax rate for basic-rate taxpayers.
Talk to the specialists
Whatever you do, seek professional advice to fully understand your circumstances before you decide to access your pension savings.
To find out more about what Dunkley’s has to offer, call 01454 619900 or email us at firstname.lastname@example.org
Alternatively, you can go straight to our wealth management partners at Octagon by emailing email@example.com or calling 0117 933 1661.