Pension freedoms boost entrepreneurship but carry tax sting

Four blocks spell out the word tax to illustrate tax sting from pension freedoms

Financial planning in association with Scottish Widows bannerOne year on from the introduction of new pension freedom legislation, the scheme has freed up money for business investment but has also resulted in some hefty tax bills, reports show

The new pension freedom legislation (PFL) was introduced just over 12 months ago. Since then, around 100,000 business owners aged over-55 have cashed in pensions to the tune of £400m and reinvested that money into their own companies, according to a report from Clifton Asset Management.

However, in some cases, this newfound financial freedom has delivered a nasty shock in the form of a big tax bill.

If you take out your whole pension in one go, the first 25 per cent will be tax-free. The rest will be subject to income tax and for most directors that is likely to be in the 40 per cent rate or 45 per cent bracket.

In fact, the government’s coffers were swelled to the tune of £900m after the first year of PFL – £200m more than the original estimate according to the Office of Budget Responsibility. Experts believe this is, in part, down to people failing to get advice about withdrawing their pensions.

One of the alternative options is known as ‘pension-led funding’. It is aimed specifically at business owners and directors who, in order to make it commercially viable, have accumulated pension funds greater than £50,000 and want to back their own business.

They don’t need to be 55 or over, and should there be more than one owner-director in the same firm, the pension funds can be amalgamated to invest in the business.

Meanwhile, the government is currently in the process of restructuring Pension Wise, a free service that has had a lower than anticiptated take-up after it was launched in January 2015. Pension Wise will be merged with The Pensions Advisory Service.

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