Taking advantage to legally minimise the tax paid

The main beneficiaries of the pensions freedom reforms are likely to be those who have built up relatively large pension pots, who will be using this freedom to avoid paying 40% tax when they draw it down under the new freedoms.

 

An example of this is if someone had a £200,000 pension pot, they could cash it in from 6 April 2015 and have £50,000 tax-free, but the remaining £150,000 would be liable for Income Tax. This means that, depending on the individual’s personal allowance and other earnings, a lot of it will be subject to 40% tax – as much as £53,600.

But if the person decides to take the pension instead as £50,000 each year for four years, then each year they will receive £12,500 tax-free and be liable for Income Tax only on the remaining £37,500, which could be as low as £5,500. So instead of paying more than £50,000 in tax, the person pays around £22,000.