The new pension rules have only been in place for a couple of months, but according to chancellor George Osborne around 60,000 people have already put them to use although whether or not thats good use remains to be seen.
Everyone who is over the age of 55 now has full control of their own hard-earned pension cash. Gone are the days of being forced to buy one of those horrible annuity things, which provided very low incomes and would swallow up the entirety of your capital on the day you die with nothing remaining to leave to your loved ones. And gone also are the days of rules telling us how much we can take and when.
In fact, now we withdraw as much as we like from our pension funds and do with it as we wish. But knowing that more than 1bn has apparently already been withdrawn stirs mixed emotions in me.
On the one hand, the new regulations are merely rectifying an egregious case of nanny-state abuse, after weve been begging them for decades to get their interfering noses out of our private business and stop telling us what to do with our own money.
But on the other hand, this Anyone can take their money and buy a Ferrari if they want stuff weve been hearing is a seriously irresponsible line to take.
What a lot of people might be missing is that our pension draw-down is subject to tax nominally income tax, but there are new regulations covering big withdrawals. And if youve been paying basic rate tax all your life and now choose to take a Ferraris worth of cash from your pot, youll be instantly pushed up into the higher-rate tax bracket.
Watch that tax
Pension fund contributions werent taxed, but its not much good saving 20% on the cash at source but having to hand over 40% of it to the taxman when you want to spend it, is it? Unless youre so well off you could afford one anyway, using your pension cash could actually be the most expensive way there is to buy a Ferrari if youre effectively taxed at double-rate.
Of course if, say, youre sure you dont have long to live and theres nobody you want to bequeath anything to, and youre happy to pay the tax and have one last big blow-out well, I say good luck to you and I hope you have fun.
But I do hope the majority of those 60,000 are sensible Foolish investors, and have converted their pensions into SIPPs that give them full control over their money and I hope theyre investing it sensibly and planning a tax-efficient draw-down.
Thats exactly what Im doing right now with my pension, and if you like the sound of being in control (while behaving responsibly), then you should be comparing SIPP providers to see who can give you the best deal and dont forget to be sure of your tax obligations before you head for that showroom!
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