An interesting study carried out by the Financial Conduct Authority (FCA) earlier this summer highlights some of the pitfalls of failing to seek professional advice when it comes to personal tax matters.
The research suggests that a number of people who are taking advantage of their new pensions freedoms are losing out big time as a result of their failure to seek appropriate advice beforehand.
According to the FCA, people are moving their cash into inferior investments, paying more tax then they need to and sacrificing valuable benefits on the original plan – and all because they are not doing sufficient research.
In fact, it would appear that HM Revenue & Customs (HMRC) has been a major beneficiary of the pension reforms, generating far more income from tax receipts than was originally forecast.
This is because many people do not appear to know that only the first 25 per cent of any withdrawal in a tax year is tax free, while the remainder is added to the individual’s income for that year and taxed accordingly.
In the first major report since the pension freedoms came into effect in April 2015, the FCA found that accessing pension pots has become the ‘new norm’ for people over the age of 55, with many opting to take lump sums rather than a regular income.
However, in what the organisation sees as an ‘issue’, 52 per cent of fully withdrawn pots were not spent but moved into other savings or investments, meaning that consumers could be paying too much tax, missing out on investment growth or losing out on other benefits.
The report also highlights the fact that consumers are increasingly acting without taking advice. As a spokesman for the FCA underlines, before the freedoms came in, five per cent of drawdown was bought without advice compared to a worrying 30 per cent today.
If you need advice on financial planning or tax-efficient investments, please contact MD Consulting.