Pension Freedoms and a Lamborghini
I’m sure you will have come across newspaper reports that some people are concerned that the new pension freedoms, (which come into effect from 6th April 2015) are likely to mean that some people make some daft decisions about their pension pot. You have probably heard that some may go a little mad and buy a Lamborghini.
This is an issue that I have talked about with clients recently, not because they were thinking of buying a Lamborghini, but I simply wanted to explain what the nw pension rules really mean. Admittedly as I don’t own a Lamborghini I’m not that familar with their prices. I’m not an avid Top Gear fan, though I do like Grand Prix. So just by way of a guide, perhaps you may like to know the reality of using a pension to buy a Lamborghini.
Making the wild assumption that you would want a brand new car, the cheapest model I can find available in the UK is the Aventador LP 700-4 which starts at £260,040 (I love the £40!). I’m sure the reduction in petrol prices will help, but I imagine that this is a car that with a top speed of 217mph and a combined urban/extra urban fuel consumption of 16 miles per gallon is also going to be expensive to run, let alone service.
On the Road Price
Assuming that this is an “on-the-road” price you need to write a cheque for £260,040 to the dealer from your pension. As of today a pension isn’t a bank account and does not come with a cheque book. But from April 6th you will be able take all of the money out (if you are 55 or older). The new rules allow you to take all your money out should you wish to – you don’t have to buy an annuity. However the original rules still apply, in that you can take 25% of the fund as tax free cash, the balance is deemed as income and taxed at your marginal rate of income tax (as it would be if it were an annuity). So, to buy the Aventador LP700-4 you need to pay £260,040, there are two ways that you could now achieve this.
1. Use the tax free cash – you could have a pension pot worth £1,040,160 and be able to take out 25% as tax free cash (£260,040).
2. Use the entire pension pot.You need a pension of tax free or have a pension pot worth at least £393,000. This would mean that you could take £98,250 as tax free cash and £294,750 as income (but suffer 45% income tax) leaving a net income of £162,112.50 and so have £260,362.50 to hand over the the Lamborghini dealer. Ok not all your income will be taxed at 45% – just the income over £150,000.. but most will be taxed at at least 40%, some at 20%, you would forfeit your personal allowance and in so doing pay an effective rate of tax of 60% on part of the income.
It would take someone with either considerable additional resources, or perhaps a very short life expectancy to decide to buy the car with their pension… essentially costing £393,000 rather than £260,040. It may surprise you and probably alarm you to learn that the average pension pot “at retirement” is about £30,000, so for most people, they are more likely to be able to buy a model Lamborghini car which will cost between £6 and £3,654 (according to the site) or perhaps you fancy a T-shirt starting at £43.
Given that your pension, in combination with your other resources is meant to last for the rest of your life, the key is to ensure that it doesn’t run out before you do. This is precisely what we do for our clients, figure out what income you need to support your lifestyle, how much is needed, what returns required and making some assumptions (which we review together) about inflation (currently 0% here in the UK) and life expectancy. When it comes to avoiding living on the street, you really dont want a pension withdrawal strategy that is too fast and too furious.