New Pension Reforms Announced in the 2015 Budget
Providing the Conservatives win the next election in May 2015, you will be able to cash in your annuity for a lump sum or series of smaller lump sums. This flexibility has advantages. A cool £20,000 sitting in your bank account can be used for all sorts of projects. There are downsides, however, to withdrawing large sums of money. This post discusses the pros and cons of withdrawing pension funds.
The pros of Cashing in your Annuity or Part of it
Clearly the obvious reason to cash in your annuity is that you have a larger amount of money to play with. This can be used for all sorts of projects and investments. You could pay off your mortgage, invest in a buy to let property or other types of investments, help out your children and grandchildren, or go on a nice big holiday.
You will have control over your cash. A lump sum like this can make a big difference to your life. Going from a pension providing an income of say £2000 a year, to suddenly having a large sum is quite frankly marvellous. All may not be that rosy, however.
The cons of Cashing in your Annuity or Part of it
Arguably, the main factor to be wary of is tax. Any sum you cash in will be subject to tax at your marginal rate. So the £2000 a year is well within your personal allowance and tax-free. £20,000, however, will see your income roll over the tax threshold, and this will incur tax at 20%. If you have other incomes, this could push your income over the next tax threshold and so on and so forth.
Also, if you claim certain benefits you may lose your entitlement to them as your income from a tax point of view will be higher.
Other factors which may make you think twice about going down this route is that it is not yet clear how your annuity will be calculated and the factors that will affect it. There is currently no information on the situation around “joint life” annuity, or if the state of your health will affect things.
If you are getting excited at the prospect of cashing in your annuity speak to me in the first instance. Should the Conservatives win the next election and this becomes law, there are plenty of pitfalls in withdrawing large sums of money out of your pension. It is best done after you have the full picture of your finances, and you have looked at all implications of drawing down big sums of money.
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