Q. I read an article in a national newspaper recently which left me with the impression they were suggesting you shouldn’t necessarily take your pension benefits from your personal pensions when you retire. Surely this must be some sort of flawed logic. Can you explain please?
A. It may well be that the article was referring to only taking pension benefits from your personal pension as and when you need them. If we take an example of say someone reaching state retirement age with a small company pension, and they have £100,000 in a personal pension which is going to utilise the new pension flexibilities and not buy an annuity. Conventional wisdom was to take the maximum tax free cash of £25,000 and also income form the remaining fund. However, unless you have a purpose for the tax free cash and/or income, i.e. you require it to repay debt, finance a purchase or provide required income, then it may well be sensible to only take out what you require at that time. This is because personal pensions are in effect just very tax efficient savings plans and if you remove money from them unnecessarily and invest it elsewhere, you may unwittingly pay taxes and in some cases charges you needn’t have incurred. In addition, pension funds (before age 75) can be left to someone else in the event of death totally free from tax, whereas if the money had been drawn out and added to your estate, there is the potential it could be liable to inheritance tax. The mindset of those approaching retirement would perhaps benefit form a reset, to see pensions savings as just that, “savings” to be accessed as and when required rather than automatically taken at retirement age.
Q. In April I withdrew some money from my ISA as I was moving home and there was an opportunity to prevent a long chain breaking down. Now that my house has sold, I have the funds to reinvest. The ISA provider is telling me I can invest just over £85,000 in my ISA, surely this is incorrect?
A. You are benefitting from new rules relating to “flexible” Individual Savings Accounts (ISAs) introduced from April. There is a limited allowance which could be subscribed to an ISA in each tax year, currently £15,240. What has changed is that if you make a withdrawal from the ISA, you are now able to reinvest this figure back into the ISA, provided this is done before the end of the tax year. This is ideal for people in your situation, where you had a short-term need for the money which had been built up using many years of annual ISA allowances. Instead of having to start again, and re-invest using a number of years of allowances, you can get the money back into the ISA tax wrapper in one go. There are some downsides, however. If you had withdrawn the cash in a previous tax year, (e.g. March instead of April) the facility would not be open to you. Also, the provider must have altered their terms and conditions to accommodate the flexibility, it is not automatic. It sounds as though your provider has decided to opt in, which is good news for you.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
