That is a staggering amount of money and, when you consider that potentially anything over 25% of that money is subject to income tax, the Chancellor George Osborne must be delighted.
Assuming that 75% or £1.35 billion of those withdrawals were taxable at 20% then he will have raised £270 million of extra tax revenue.
The pension changes are in the main very positive after all pension pot owners are “grown ups” and should be in control of their own money.
But I can’t help feel that this has been his motive all along to raise extra tax revenue; all in one go rather than taxing a smaller stream of income over very many years.
There are some ways however of taking money from your pension pot without suffering a huge income tax bill.
For example you can simply take your entitlement to a tax free cash lump sum and leave the rest of your pension fund invested.
This is perfectly allowable although some pension pot providers will not make it easy for you.
If you do this remember you may then have less pension pot to provide income in later life.
However if you invest wisely then future investment growth and potentially future contributions may well replace the tax free cash that you have taken and spent.
One of our clients very sensibly took her tax free cash lump sum and the is planning to take a further lump sum of approximately £10,000 per year until she has used up her pension pot entirely.
As she has no other taxable income these payments are effectively tax free.
Over the next few years she will take the whole of her pension pot without paying any income tax at all.
That said, she is initially taxed on those withdrawals (in excess of the tax free cash lump sum) and has to claim it back from the taxman.
So if you have no taxable income you might want to employ an approach like this to have more of your pension pot in your own pocket rather than in the Chancellor’s.