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Tax hitch could spoil Osborne pension plans

The UK Government's pensions revolution could turn out to be too good to be true, personal finance experts have warned.

RADICAL: George Osborne hopes to change savings culture.
RADICAL: George Osborne hopes to change savings culture.

Chancellor George Osborne will today announce details of the scheme which will let hundreds of thousands of people who retire on private pensions each year benefit from greater flexibility.

However, those who take advantage early could face steep tax bills unless they stagger withdrawals, financial services provider NFU Mutual said.

The change would allow people who have retired to spend their pension pot on a Lamborghini, according to the notorious comment by Liberal Democrat pensions minister Steve Webb.

However, the organisation's analysis of official figures from the Office For National Statistics found anyone looking to do so would have to find in excess of £165,000 for the car, and an additional £63,000 in tax.

Even those with less grand ambitions could pay large amounts in tax. Those who retire on or before their 65th birthday will face an average tax bill of nearly £13,000, if they don't stagger withdrawals from their pension savings across more than one tax year, the Mutual said.

When a sum is withdrawn from a pension pot, it will incur income tax and be treated by the tax-man as income for one year.

This could take people into the 45 per cent tax band. Anyone taking out more than £120,000 would also lose their £10,000 personal allowance.

The average pension wealth held by a person approaching retirement - aged 55 to 64 - is currently £77,800. Taking all of this sum out in one tax year would provide a tax-free lump sum of £19,450 and the remaining £58,350 would be taxed as an income, leaving them owing £12,967 to HMRC, according to the analysis.

Those with larger pots could face even steeper tax penalties including some at an effective rate of 60 per cent. Stephen Berry, personal finance specialist at NFU Mutual, said: "When it comes to pensions, next year's changes will allow people to drive off with all of their retirement savings.

"However, if you're thinking about taking it all out in one go, there are a few warning signs you should look out for.

"Easing off the accelerator and taking some of your pension pot over more than one tax year could significantly reduce your tax bill."

Mr Osborne will announce details of his plans in a formal response to a three -month consultation by the Treasury.

The Government argues that the current annuities market is not working well for consumers.

At the moment, pension pots can be used to buy a fixed annual sum for life on retirement, known as an annuity.

The reforms are intended to allow pensioners to vary the level of income they receive depending on their circumstances.

Launching the consultation, Mr Osborne said: "We cannot expect people to save responsibly for their retirement if they do not believe they will get value for money from their savings when they come to access them."

The radical pensions reforms will encourage a new culture of saving, he said.

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