The last few weeks have seen a number of headlines regarding the forthcoming changes in pension regulations which will make access to pension funds more attainable for the masses. The first batch of changes will come in on 6 April 2015 whereby those over 55 years of age will be able to access their whole pension fund in one go. Some experts have been suggesting that this sudden access to significant funds could prompt a property boom although nothing is quite as straightforward as it seems.
Is access to funds free?
From the age of 55 onwards you will be able to withdrawn a 25% tax-free lump sum, much the same as you have been able to for many years. However, you will also have access to the remainder of your fund in one lump sum or a drawdown process over the longer term. The problem is that any income which you take from your fund after your 25% tax-free lump sum will be treated as “additional income” and you will be taxed at your relevant rate.
There is also the issue of pension fund provider charges with concerns that some pension fund companies may introduce relatively high fees, to dissuade you from making large withdrawals, so that they are able to maintain as much of your pension fund going forward as possible. It is worth noting that pension fund management fees would obviously fall/be eliminated if you were to withdraw a significant portion of your funds under the new regulations.
Why will this not prompt a property boom?
While the change in pension fund regulations will give many people a significant amount of money to invest on their own terms for the future, the above charges will come into play. For example if you are looking to acquire a property worth around £300,000 and place down a deposit of £150,000 from your pension fund you could end up with a tax bill of around £40,000 (or more) for such a transaction.
There is also the fact that rental income from property assets held outside of your pension scheme would attract income tax with potential capital gains tax if ever you were to crystallise a profit on the property. While these are obviously negative aspects to the proposed pension fund changes it is worth noting that residential property is not currently allowed as a pension fund investment under normal circumstances. So while there are significant taxes to take into consideration this would be the only way to invest in residential property in the long term.
Beware of the scams
While we will see more and more information and advice regarding pension fund changes in the weeks and months ahead there is already concern that scammers have plans in place to defraud ill-advised pension fund recipients. It is imperative that you do not react to cold calls and ensure that you have advisers in place who are fully regulated, registered and up-to-date on the latest pension fund regulations.
The freedom to access our pension fund will certainly prompt an array of fraudsters to try to confuse you, take advantage of you and potentially take receipt of your hard earned pension fund.
* Please note that the above article is for information purposes only and you should always consult your financial advisor before entering into any financial transactions.