A depressing bit of research arrives from Fidelity. It turns out that one in ten people still think that after pension freedom day' (fast approaching in April) they will be able to withdraw 100% of their pension pot entirely tax free.
42% of people either fall into this category or have no idea at what point their withdrawals begin to be taxed (only the first 25% comes tax free) and a full 45% of those planning to take out more than 25% in cash "do not understand the tax implications of doing so."
These people, says Fidelity's Alan Higham, are in for a "huge surprise when their bill arrives from HMRC". Instead of getting their money tax-free, they will find they have to pay income tax on it at their marginal rate.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
We've been thinking a bit here about how to make that huge surprise go away. And, prompted by a reader comment under a previous post, we think we might have an answer: what if you moved to Portugal and made yourself a resident there for tax purposes during the year in which you want your money?
This makes sense for the simple reason that all withdrawals from UK pension wrappers are treated as income, and that in Portugal it is possible that any income from your pension could be paid free of income tax (income from public sector pensions is excluded from this).
Yes, you read that right: in Portugal there are special rules for non-habitual residents drawing money from occupational pensions, which effectively allow them ten tax-free years of residency. So while resident there (this should be very straightforward to establish as long as we are all in the EU) you could withdraw the lot tax-free from a suitable pension and do with it what you like.
Say you had £400,000 in a pension. If you took it out in the UK as one lump sum, your income tax bill (assuming you had no other income that year) would be £121,000. In Portugal it would (we think) be zero.
This requires professional financial advice, but if all went well, you'd end up with £400,000 in cash. Then what? Put your feet up, I say. And order some of that nice pink wine. Maybe with the bubbles.
PS There is bound to be a flaw in this excellent sounding plan. I invite readers to tell us what it is.
-
House prices rise 2.9% – will the recovery continue?House prices grew by 2.9% on an annual basis in September. Will Budget policies and ‘higher-for-longer’ rates dent the recovery?
-
Nvidia earnings: what to expectNvidia announces earnings after market close on 20 November. What should investors expect from the semiconductor giant?
-
Our pension system, little-changed since Roman times, needs updatingOpinion The Romans introduced pensions, and we still have a similar system now. But there is one vital difference between Roman times and now that means the system needs updating, says Merryn Somerset Webb.
-
We’re doing well on pensions – but we still need to do betterOpinion Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn Somerset Webb.
-
Older people may own their own home, but the young have better pensionsOpinion UK house prices mean owning a home remains a pipe dream for many young people, but they should have a comfortable retirement, says Merryn Somerset Webb.
-
How to avoid a miserable retirementOpinion The trouble with the UK’s private pension system, says Merryn Somerset Webb, is that it leaves most of us at the mercy of the markets. And the outlook for the markets is miserable.
-
Young investors could bet on NFTs over traditional investmentsOpinion The first batch of child trust funds and Junior Isas are maturing. But young investors could be tempted to bet their proceeds on digital baubles such as NFTs rather than rolling their money over into traditional investments
-
Negative interest rates and the end of free bank accountsOpinion Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK banking system slightly less awful, says Merryn Somerset Webb.
-
Pandemics, politicians and gold-plated pensionsAdvice As more and more people lose their jobs to the pandemic and the lockdowns imposed to deal with it, there’s one bunch of people who won’t have to worry about their future: politicians, with their generous defined-benefits pensions.
-
How the stamp duty holiday is pushing up house pricesOpinion Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.
