Should you buy a "Lamborghini" with your pension fund?



AJW Wealth Joint PicIn the recent budget announcement George Osborne promised individuals more freedom with their pension savings when they retire.  This is the most drastic change to the retirement system in decades.  Whilst the full details are still to be finalised and incorporated into the Finance Act, Pensions Minister Steve Webb said "savers should be free to buy a Lamborghini if they wish".


How realistic is this and are there potential pitfalls as well as benefits with these changes?


With people living longer the need to provide a regular income in retirement has not gone away.  What these changes allow is the flexibility in how you produce an income.


With increased flexibility comes choice and some individuals may decide to "spend it all" but if they do so as the Pension Minister has stated "if they squander the money they will only have the state pension to live on".


One drawback of the new rule is that 75% of your pension pot is still taxed at an individual's highest marginal rate of tax.  So an individual with say £300,000 in a pension fund who "takes it all out" would be left with approximately £210,000.  A minimum of 25% of the pension fund can still be taken tax free (£75,000) but the remaining £225,000 would be treated as income by HMRC for that year resulting in the individual becoming a 45% tax payer and losing the personal allowance, which disappears on income over £120,000.


Most individuals I suspect would not want to pay the tax therefore it becomes a delicate balance of how much income is needed and how can it be taken in the most tax efficient manner possible.


One option is to keep their pension savings invested and simply take regular drawdown income from their fund or take portions of the fund as and when required out and invest into other possibly more tax efficient vehicles.  Of course buying an annuity is still an option.


There is anticipation of a surge in the property market with a 'Buy to Let' property being a potential attractive option for pension savings.  For the experienced investor with no immediate need for income, the opportunity to reinvest their pension savings into a business that qualifies for EIS (Enterprise Investment Scheme) or SEIS (Seed Enterprise Investment Scheme) status may seem attractive, as some or all of the tax paid on withdrawing the pension may be mitigated.


Whilst the freedom to choose how you spend your pension fund is welcomed, there are still numerous avenues to consider.  This has raised the importance for individuals to seek quality face to face advice both whilst saving for retirement and even more importantly now, when they retire to ensure they are fully aware of their options before coming to any decision.


For further information or advice contact Andrew Jones at or on 07557 351471 or Jayne Williams at or on 07557 351798

029 2033 8144 | |