 |
|
| CURRENT SECTION :: News |
The No. 1 Resource for UK IT Contractors: Comprehensive guides - Daily news IT contract jobs - Market rates - Forums - IT contractor network - Calculators |
|
 |
With the rules on releasing tax-free cash from your pension set to change next April it could be a case of cashing in now whilst you still can. At the moment, Contractors aged 50 or over can draw a quarter of their pension fund as a tax-free cash lump sum yet from April 2010 you will need to be 55 or over to enjoy the same privilege. What can the funds be used for and do I need to draw an income? The lump sum is free for you to use as you see fit. It could pay off the remainder of your mortgage leaving you free from debt, be used for home improvements, a holiday or any other use you have in mind. Thanks to increased flexibility surrounding pensions, taking the tax-free lump sum doesn’t now force you into early retirement or into receipt of the remaining pension fund income. You are free to continue working part time or full time until you decide to fully retire and need the regular income. Unlike under previous pension regimes you need only begin to draw your income when the time is right for you. In this way the funds left behind after taking tax free cash can either be used to buy an annuity now or more likely will be left invested in what’s known as unsecured pension (USP) with a further chance to grow. This allows you to take no income from the fund whilst in this initial period of USP and saves you from paying tax on monthly pension benefits that are surplus to requirements. Deferring benefits in this way allows the fund to potentially grow even further and only when the time is right do you start to generate an income, by which time you may even be paying a lower rate of tax than you do so currently. Spend or invest to grow yet more cash? Whilst it might not be beneficial to cash in on company or occupational pension schemes, cashing in assets such as personal pensions could even give you an opportunity to re-invest for greater overall gains. Subject to certain anti ‘recycling’ rules you could invest funds into another pension fund and benefit from tax relief again of up to 40%. If you are a higher rate tax payer you can effectively achieve a 114% ‘return’ on your investment. An Example: If you contribute £8,000 then this will be grossed up to £10,000 by virtue of the basic rate tax relief of 20%. You will claim back £2,000 higher rate relief via your tax return which reduces your net cost to just £6,000. If you are over 50 you can take a quarter of the £10,000 as a tax free lump sum. Although this would reduce the total value of your pension pot to £7,500 you would have reduced your net cost to just £3,500 which would give you 114% ‘return on your investment’. If you bear in mind the tax relief that you have had on the original pension investment then the profit at the expense of the taxman is even greater still. It is important to remember that you are not allowed to blatantly recycle the tax free cash into a pension and claim for higher rate tax relief on it again however this does not stop you from contributing cash in smaller investments over a period of time. In this way, paying off a mortgage can save you from needlessly paying interest on the debt and the money that isn’t going to the lender each month can be gainfully invested and also benefit from up to 40% tax relief. By investing the money into another pension fund you are effectively allowing yourself the chance to claim another tax free cash lump sum when you turn 55 (i.e. the age limit having change in April 2010) which could be too good an opportunity to miss. This process could also be the perfect opportunity to move funds into better areas if the original scheme had been performing badly. Is this right for me? It is important to consider the different options available before deciding on whether or not to release cash from your pension. Firstly, any money that you take from your pension now and don’t reinvest means less money when you decide to retire. This is because you are not only affecting the current value but also will lose the potential for growth on this tax free cash sum in the future. Whilst the deadline is approaching for Contractors aged 50 or over to take advantage of the option of early tax free cash, this option is not going to be taken away altogether. In April 2010 the rules will is simply change to age 55 but the only potential risk in waiting is that the laws may be changed again over the next five years making you either wait longer or changing the way in which cash can be released altogether. The complex nature of taking money from your pension means that you should>seek expert advice from an Independent Financial Adviser before making a decision. Tony Harris Jul 1, 2009 Email this article Printer friendly page Previous Page
|
|
 |
||||||||||||||||||||||||
| All content © Contractor UK Limited | [Register for News Letter] | [Privacy Statement] | [Terms of Use] | [Top of Page] |