Hug your financial advisor, not the taxman!
I KNOW a doctor who treated a farmer recovering from a mild heart attack. The farmer wouldn't take exercise, because he reckoned we are born with a certain number of breaths allocated to us – and when you've run out of breaths, your time is up.
And you can't argue with that.
His financial adviser would add: you can't afford to run out of money, either. This is why our pensions are so important.
However, it would appear that many of us are throwing away part of our pension savings in totally unnecessary and avoidable payments to the taxman.
It reminds me of a very good question financial planners often ask their clients: “Do you love the taxman more than you love your own family?”
A new report from Prudential tells us that one in 10 of those planning to retire this year intend to withdraw all their pension savings in one lump sum, rather than taking them in smaller amounts over several years.
As a result, a fifth of those people (20 per cent) may incur avoidable tax bills by taking out more than the 25 per cent tax-free limit on withdrawals.
This reminds us of the recent warnings from the Financial Conduct Authority (FCA) that a third of consumers who make pension decisions without the guidance of an adviser end up with unsuitable investments, or with a pension income that could have been up to 37 per cent higher if they had just taken advice!
Which would you rather do? Take quality independent advice, or wind up with a pension income of £300 a month when it could have been over £400? Whichever you choose, you'll have the rest of your life to enjoy it or regret it.
Since the arrival of the ‘new' pension freedoms in April 2015, 1.1 million people aged 55 and over have withdrawn £15.74bn from their pensions.
Government figures tell us those people paid £2.6bn in tax in the 2015/16 and 2016/17 tax years, and another £1.1bn in 2017/18.
There's no doubt about it. These are boom years for the taxman – sounds like there's a lot of avoidable tax being paid, out there.
And it's not even that those drawing out their whole pension need the cash for some urgent task today. Nearly three-quarters of them (71 per cent) are planning investments in property, investment funds, or even just a savings account. It's quite possible that they could have done this in stages, over a few years, and minimised or avoided tax payments altogether.
Just as a matter of interest, Prudential found that, of those planning to spend the cash, a third (34 per cent) were planning on that dream holiday, a quarter (25 per cent) planned to spend their money on home improvements, and a fifth (20 per cent) were intending to give money to children or grandchildren. Again, the question could be asked: did they really need their entire pension right away? Could this not be done in stages, and thus reduce or avoid the tax bill altogether?
And if you're not planning to spend your money right away, what happens when you are deciding on future investments?
Again, plenty of scope for losing out, if you don't seek financial advice.
The FCA tells us that nearly all (94 per cent) of consumers who accessed or ‘drew down' their pots without taking advice accepted the first drawdown option they were offered – the option offered by their pension provider - without shopping around.
Among advised consumers, on the other hand, only 35 per cent took the first option, the rest found that their independent adviser got them a far better deal elsewhere.
So don't hug the taxman ... hug your financial adviser! They can save you tax and get you sorted with expert advice on your pension!
::Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information on our Facebook page “Kennedy Independent Financial Advice Ltd” or our website www.mkennedyfinancial.com