Familyfinance - Warren Shute is a chartered financial planner with Lexington Wealth Management. Contact him on 01793 771093 or warren@lexingtonwealth.co.uk

From the moment the Spring Budget 2014 was announced, pensions have been a strong and recurring topic in the news and on people’s lips.

With so much more to think about now with your pensions, and how you can effectively make your retirement pot work and last for you, are the new rules for pension fund drawdown a good idea?

From April 2015, a proposed relaxation will permit unrestricted pension fund drawdown to all, regardless of pot size. This has carried some predictions of a flood of requests from pension disaffected retirees. With a view to draw entire funds and invest into property, this will generate rental income as a pension.

Apart from the potential extreme lack of diversification such a strategy could represent, there is also the point that aside from the 25% Pension Commencement Lump Sum (PCLS – tax free cash) the remainder of the fund withdrawn would suffer tax at the withdrawer’s marginal rate in the tax year of withdrawal.

Say the investor had a fund worth £200,000. £50,000 could be taken as tax free cash. Say they had £10,000 of their basic rate threshold left in the year of encashment, then based on 2014/15 tax rates and bands the £150,000 would generate tax of £2,000 on £10,000 and about £57,000 on £140,000, leaving a net sum to invest of £50,000 (PCLS) + £91,000 = £141,000 Then there's stamp duty (SDLT) on the value of property at 1% on a purchase over £125,000 up to £250,000 – that's about another £1,400 gone, aside from any other expenses associated with the purchase. Inlet periods, renovation and refurbishment costs need to be factored in too.

The rent would be subject to tax as would any income ‘drawn down’ from the pension. Although all dividends received by the pension fund from the equity portfolio would come with a tax credit, this would be non-reclaimable.

Naturally, in comparing the likely overall return, there’s also the chance of capital growth in the property to take into account – subject to capital gains tax on realisation but ‘wiped out’ (for tax purposes with revaluation) on death.

And there would also be the chance of capital growth on the investments held in the pension fund – with gains realised in the fund being tax free.

Lots to think about. Potentially a good idea in theory but, in practice, perhaps not so. Either way, advice will be essential. Please contact Warren Shute at Lexington Wealth Management on 01793 771093.