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In our ongoing mission to debunk common myths about pensions, it’s time to address the widely held belief that pensions are inherently tax efficient. Whilst they possess in-built tax advantages, the reality is that care is needed to ensure that you capitalise fully on those advantages.
Pensions offer a tax-efficient way to save, thanks to government tax relief while individuals are working.1 However, complications can arise when it’s time to access these funds. At this point individuals are faced with a bewildering array of options and must grapple with the tax implications of each choice.
Financial guidance, or ideally, advice is desirable for most people to make informed retirement decisions, yet many are lacking support. Alarmingly, nearly 73% of individuals in their late 50s have not received any pensions or retirement information in the last three years. This lack of guidance is concerning, especially as many people accessing defined contribution (DC) pots for the first time do so without seeking any guidance or advice.2
Mercer insights reveal a startling reality: a significant number of people are paying higher tax bills on their retirement savings than they necessarily need to. A staggering 33% of those taking cash payments are seeing more than 40% deducted in tax on payment.3
“While pensions may be a tax efficient way to save, accessing them can be a different story,” explains Adele Ray, head of DC client development, Mercer. “Choosing the wrong income strategy can lead to unnecessary tax liabilities, undermining the potential benefits of tax-efficient pension savings. It’s clear that support is needed to ensure members are not losing their cash at a time when they need it the most. Understanding the tax implications of pension withdrawals is essential for optimising retirement income.
“Our digital retirement advice service is designed to help individuals maximise the tax efficiency of their income. By running millions of calculations, it can identify the most effective strategies for withdrawing funds which in some cases can result in thousands of pounds more to spend in retirement.4 This highlights the importance of making informed decisions when it comes to accessing pension savings.”
Inheriting tax?
From April 2027, unspent DC pensions will be included in estates for inheritance tax (IHT) purposes, potentially pushing thousands of families over the £325,000 threshold and subjecting them to a 40% tax bill on the excess.5 The introduction of IHT on pensions could reshape how people approach estate planning, as they will need to consider the potential tax implications when passing on pension funds.
It’s clear that the pensions industry must assist individuals in making informed decisions about accessing their savings in a tax-efficient manner that supports them throughout their lives. Mercer’s report ‘What’s the Price of Freedom?’, highlights the need for a more straightforward and supportive process ensuring that fewer people have their retirement savings eroded by paying more tax than they need to.
The Mercer Master Trust is provided by the Mercer Master Trust Trustee Board acting in conjunction with the founder of the Mercer Master Trust, Mercer Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No.984275. Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU.
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1 Pension tax relief | MoneyHelper
2 Individuals-challenges-managing-pensions-through-retirement-1.pdf
3 Data from Mercer’s administration partners
4 Hub Financial Solutions Ltd Destination Retirement Service.
5 Rachel Reeves’ death tax could take more pension money | Personal Finance | Finance | Express.co.uk
