Five pension traps to avoid

2nd March 2015

Jonathan Watts-Lay, Director, WEALTH at work, Speaks to The Times about how you will need to make careful choices if you want to make the most of the new pension freedoms in retirement.

Jonathan Watts-Lay says these ‘hidden’ commissions can cost almost as much, if not more, than employing a financial adviser on a straight agreed fee. He added: “People are going to have a greater need for advice in the future as they face greater complexity of choice and retirement income is no longer just about a pension; it’s about all the savings you possess, which have to be looked at as a whole.”

Jonathan Watts-Lay takes the example of someone retiring at age 65 on an annual salary of £38,000 who decides to cash in his entire pension pot of £42,000. After taking the maximum 25 per cent of the pot as tax-free cash, that leaves £31,500 of taxable income that, when added to the individual’s salary of £38,000, gives a total income of £69,500. This pushes him well into the higher-rate tax bracket, even after the deduction of the personal allowance.

Jonathan Watts-Lay calculates he would have a total tax bill of £17,203, of which £11,723 would be tax on the cash withdrawn from the pension pot. He said: “An adviser could help someone to phase their withdrawals to avoid higher rate tax.”

To read the full article please click here.