Last year’s introduction of pension freedom fundamentally changed how people can take an income in retirement. However, it has also widened the gulf in the public’s understanding of pensions.
UK adults are already missing out on £1.9 billion in unnecessary tax by not saving enough into pensions, according to the 2016 Tax Action report by unbiased.co.uk, the site that connects millions to advice. By giving people full access to their pension pots, the reforms have created further tax hazards that many consumers are not yet aware of.
Today Prudential and unbiased.co.uk launch a new Pension Tax Guide to help raise awareness. It explains in simple terms how to maximise the tax-efficient benefits of pensions at every stage, from building up savings to taking an income in retirement.
The guide will be useful to anyone with a pension, whether they are nearing retirement or have just enrolled into their first pension scheme. The benefits of tax-relief and long-term tax efficient saving are still poorly understood by the UK public, so this at-a-glance summary is a timely release for the anniversary of pension freedom.
Karen Barrett, chief executive at unbiased.co.uk, comments: ‘Pensioners are subject to the same tax rules as everyone else, but will typically find that their budget is already squeezed by at least 30 per cent in retirement. So the last thing any pensioner wants to see is a large – and potentially unnecessary – tax bill. An individual might rush to cash in a large chunk of their pension, without realising that the withdrawal might catapult them into the higher-rate tax band, wiping out much of their tax savings in one go.
‘Such mistakes are as costly as they are unnecessary. So we have created this guide to explain how tax and pension relate to one another – how you save tax on the way in, and how you can continue to minimise it when you take the money out. It’s easy when you know how, but a great deal about pensions is counter-intuitive if you don’t have the knowledge to hand. We hope this will help to fill that gap.
‘Pension freedom has done a lot of good, but it has left many people a bit lost. As a result, the point of retirement is now probably the single most important time of life at which to seek professional advice. These are hugely important decisions that will have implications for the next 20 or 30 years, or even after someone’s death, so it’s only sensible to make every effort to get them as right as possible. That way, people can go on to enjoy their retirement with full peace of mind.’
The 2016 Tax Action report revealed how people across the nation are still not taking advantage of basic tax breaks, wasting billions of pounds per year. Pensions remain one of the biggest areas of wastage, despite big recent improvements as a result of auto-enrolment into workplace schemes. Further wastage is likely to occur if people access their pension pots without first taking professional advice.
Extract from the Pension Tax Guide: tax scenarios for retirement income
Les Cameron, tax specialist at Prudential, comments: ‘It's encouraging to see that more people are now saving for their future through a workplace pension. This means that more of us are maximising our pension savings by benefiting from both employer contributions and valuable tax relief from the Government. Importantly, making pension contributions can also help to reduce the amount of tax people pay. Seeking professional financial advice can highlight the benefits of pension saving as part of general financial planning.’
Notes to editors:
1 TaxAction report 2016 has been produced by Opinium Research on behalf of unbiased.co.uk. All figures are based on calculations done on unrounded values to guarantee accuracy; text paragraphs display rounded figures. Survey results come from an Opinium online survey, commissioned by unbiased.co.uk, of 2,006 UK adults aged 18+ carried out between 20th and 24th November 2015. Results have been weighted to nationally representative criteria.
22015 TaxAction Research can be found here.
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