Tax can be a mind-boggling issue and it seems pensioners are being left in the dark when it comes to understanding what they will be handing over to the taxman from their pension savings.
This year's budget gave much more flexibility and control to pensioners as to how they can draw their hard-earned pension savings. The purchase of an annuity used to be almost standard practice but with the new rules, when people reach the age of 55 they now have the freedom to withdraw their money as they wish – subject to the marginal rate of income tax for that year.
It's this rate of tax that could catch many pensioners out, as if they withdraw a large sum in one tax year they could find themselves climbing the tax scale away from the basic rate they are used to, even paying as much as 45% on part of their fund - a level they may never have reached during their working lives.
If they have been working during that tax year before retirement and then decide to draw their entire pot, they may vastly exceed their allowance, meaning they will be paying an, often unexpected, large amount of tax.
Research by MGM Advantage has revealed a lack in understanding when it comes to how much tax people expect to pay, with 59% of those aged over 55 saying they don't realise the tax implications of drawing their whole pot in one go.
Demonstrating the obvious need for seeking financial advice is the fact that 83% of people claim they would be more likely to leave their money in their pension and draw an income as needed if they knew the implications of taking the whole pot. Only 17% said they would be happy to pay tax on any withdrawal.
Andrew Tully, pensions technical director at MGM Advantage, commented: "The new freedoms proposed by the Chancellor could result in some scary tax bills for those wanting access to all of their pension savings in one go. While increased flexibility is good and something we fully support, there is a huge potential downside and a minefield to navigate. We need to make sure people fully understand the impact of the tax hit if they want access to their pension money in one fell swoop.
"Retirement just got a whole lot harder to work out, so speaking to a professional financial adviser will be key in the new world to help consumers fully understand the options that will be available to them.'
And one of those options is an annuity. After the Budget there were fears that annuities could be a thing of the past, but further research carried out by Partnership has revealed that people have not ruled them out just yet, with many of the benefits still being very important to people.
Getting your hands on a large sum of money may seem exciting at first, but when you consider that it needs to last you throughout your retirement, are you confident you can make it work?
An annuity takes the strain out of the money management with a guaranteed income for life, something as many as 64% of those questioned cited as being the most important feature of a retirement product.
A further 31% wanted to get as much income as possible, while 24% wanted their money to keep track with inflation and 21% wanted a product that was tax-efficient. Control over how much income they receive each month was a need of 17%, while 15% wanted a low-risk product, 14% wanted to ensure their spouse or partner would receive an income if they passed away and a further 12% wanted to leave an inheritance. All, or most, of these factors would most likely be addressed by the range of annuity products on the market and searching for the right one for you is essential.
Andrew Megson, managing director of retirement at Partnership, commented:
"While the recent Budget announcement has been hailed as the death knell for annuities, it is interesting to see that the features that most people want from a retirement product are essentially those offered by a best buy standard or enhanced annuity.
"Running out of money in later life naturally appears to be one of people's biggest fears which is a real concern as so little is really understood about longevity. Indeed, not only do the majority of people underestimate the time they will spend in retirement, their estimates are based on simple averages so some will live ten or even twenty years more!
"This clearly highlights the fact that rather than attacking the industry as a whole, we need to concentrate on helping people to make the best choices for their own individual retirement needs."
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