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New Pension Rules and Their Tax Implications

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The UK Government has introduced a new model for re-structuring pension rules, mainly concerned with the taxation of pension bills. The new pension rules are to be implemented by April, next year, and in the words of George Osborne, under new pension rules pensioners will have more liberty to make decisions regarding the use of their pension money.

Under the existing model that defines pension laws in the UK, pensioners have the liberty to acquire 25% of their saving as a lump sum amount, which is completely tax-free. The rest of the pension amount is usually used for purchasing an annuity. However, the new tax rules suggest that pensioners now will not only be able to draw their pension amounts in smaller lump sums, but there is a change in the consequential tax implications too.

As implied by the new model for pension rules, pensioners over the age of 55 will now be able to take numerous smaller lump sum amounts over a time period, as opposed to the extraction of 25% of the entire pension amount at an instant. Furthermore, in case of each extraction 25% of the amount acquired will not be subjected to any tax payment.

Though, the stated major change in pension rules and its tax implications on basic tax payers may be considered as a novel stance by the UK Government, but according to various pension advisors, these rules already existed in the current model for pension rules, described under the headings of phased retirement and vesting.

Perhaps, the new pension rules are to benefit higher tax payers the most, who may see the new set of rules as a means to avoid making a considerable tax payment of 40%, as a consequence of their sizable pension pots. If pensioners opt for extracting multiple smaller pension amounts over a time period, it is highly probable that their overall tax payments are to reduce by a considerable ratio.

Similarly, pensioners who have an average pension pot of £ 40,000, under a defined contribution scheme, may also feel the impact of new tax implications as a consequence of new pension rules. Under new rules, basic tax payers who have employed defined contribution schemes might be required to make minimal tax payments, if they choose to draw their pension in small lump sum amounts over an extended time period. However, they need to give due consideration to the fact that if they opt to draw their state pensions, along with an amount from their pension pots, then the entire amount drawn will be subjected to tax payment and they might be needed to pay a higher percentage of tax than expected.

Moreover, if you are of age 55 or above, you may even treat your pension pots as a bank account. Under the new rules, pensioners of the prescribed age may access their pension amount, reserved in their pension pots, at any given point in time. The pension amount reserved in the pension pots will be subjected to marginal tax payments only and you may draw a suitable amount whenever needed.

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