Pension Freedom

£ locked in IceThe most radical reforms this century

In Budget 2014, Chancellor George Osborne promised greater pension freedom from April next year. People will be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax-free.

For some people, an annuity may still be the right option, whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown.

Extended choices

‘We’ve extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum,’ Mr Osborne said.

From 6 April 2015, people will be allowed full freedom to access their pension savings at retirement. Pension Freedom Day, as it has been named, is the day that savers can access their pension savings when they want. Each time they do, 25% of what they take out will be tax-free.

Free to choose

Mr Osborne said, ‘People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan.’

From 6 April 2015, people aged 55 and over can access all or some of their pension without any of the tax restrictions that currently apply. The pension company can choose to offer this freedom to access money, but it does not have to do so.

Accessing money

It will be important to obtain professional advice to ensure that you access your money safely, without unnecessary costs and a potential tax bill.

Generally, most companies will allow you to take the full amount out in one go. You can access the first 25% of your pension fund tax-free. The remainder is added to your income for the year, to be taxed at your marginal income tax rate.

This means a non–tax payer could pay 20% or even 40% tax on some of their withdrawal, and basic rate taxpayers might easily slip into a higher rate tax band. For those earning closer to £100,000, they could lose their personal allowance and be subject to a 60% marginal tax charge.

Potential tax bill

If appropriate, it may be more tax-efficient to withdraw the money over a number of years to minimise a potential tax bill. If your pension provider is uncooperative because the contract does not permit this facility, you may want to consider moving pension providers.

You need to prepare and start early to assess your own financial situation. Some providers may take months to process pension transfers, so you’ll need time to do your research.

Questions to ask

It’s important to ask yourself some pertinent questions. Are there any penalties for taking the money early? Are these worth paying for or can they be avoided by waiting? Are there any special benefits such as a higher tax-free cash entitlement or guaranteed annuity rates that would be worth keeping?

If you decide, after receiving professional advice, that moving providers is the right thing to do, then we can help you search the market for a provider who will allow flexible access.

Importantly, it’s not all about the process. You also need to think about the end results.

Withdrawing money

What do you want to do with the money once you’ve withdrawn it? You may have earmarked some to spend on a treat, but most people want to keep the money saved for their retirement. Paying off debt is usually a good idea.

If you plan just to put the money in the bank, you must remember you will be taxed on the interest. With returns on cash at paltry levels, you might be better keeping it in a pension until you need to spend it. Furthermore, this may also save on inheritance tax.

Finally, expect queues in April 2015. There’s likely to be a backlog of people who’ve put off doing anything with their pension monies since last year. Those who get through the process quickly and efficiently will be the ones who’ve done the groundwork.

For retirement advice call Jeremy on 01554 770022 or 07989 599423 or use the Contact form:

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.
A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Pension Income Options – a difficult choice?

Here is my article which appeared in the Llanelli Star  on 14th August 2013:

Question:

I am nearing retirement and have a personal pension that I started many years ago.  I have received lots of paperwork from my pension company.  I want to make sure that I make the correct choice when I apply for my pension income, but there seems to be many options available.  I am worried that I will make the wrong decision, which could affect my income for the rest of my life.

Response:

We’d all like to think that we’ll have a level of income that will really let us enjoy our retirement. However, with the cost of living rising all the time, it’s more important than ever to consider all the options available, to help you get the most out of your retirement income – and your retired life.

When you retire, you’ll be able to access your pension savings. You can usually take a tax-free cash lump sum of up to 25% of the pension fund. Meanwhile, the rest is often used to buy a pension annuity, designed to give you a stable, guaranteed income for the rest of your life.

What you might not know is that you don’t have to take your pension annuity from the same company that you’ve been saving your pension with. The ‘Open Market Option’ means that everyone can shop around all the pension annuity providers in the market to get the best possible income in retirement. There are sometimes significant differences between the incomes that pension annuity providers will offer you.

Some providers may give you a higher income if you have certain medical conditions, such as diabetes and high blood pressure, and lifestyle factors such as smoking. The difference between the best and worst incomes offered to you as a pension annuity could be considerable – so it’s worth speaking to an Independent Financial Adviser so that you can help you get the most suitable solution for your individual circumstances.

It’s also worth remembering that with most pension annuities, once you have made your decision you can’t normally change your mind and move your savings elsewhere.

Don’t lose out in retirement

As you head towards retiremCouple seeking retirement annuity pensionent, you spend a lot of time thinking about what you can do. It’s time to please yourself – work part time, take on a personal project, tour the world or, without any guilt, do absolutely nothing. It’s taken you a lifetime to get here so giving it a bit of thought is very satisfying.

However, a recent report from the National Association of Pension Funds found that many people do not include their finances in these thoughts. As a result, pensioners are missing out on as much as £1 billion in potential income1.

It all looks so simple

If you have been saving into a pension, either with your employer or on your own, you will likely get an offer from the insurance company or pension provider just before (they think) you are due to retire. This will quote an income which they guarantee to pay you in exchange for your hard earned savings. It will all look very easy –sign on the dotted line and everything is sorted out for you.

However, the NAPF’s report suggests that taking this offer could cost you dearly. You could end up settling for an income which, had you spent a little time checking the competition, could have been significantly increased by another provider.

Take every penny

There are many different options available at retirement and lots of providers fighting to get your business. With the competition so fierce, it is essential that you check every offer to find the most suitable solution and maximise the income you receive.

It is the lack of action which has led the NAPF to conclude that pensioners are losing £1 billion.

Their advice is therefore, shop around. Not only does this allow you to seek out better offers, it also gives you the chance to consider different factors. Inflation, for example, and health. The Association of British Insurers2 suggest that as many as 49% of people have lifestyle issues (eg: smoking, high blood pressure) or suffer from health conditions (eg: cancer, diabetes) which could increase the income they receive even further. Sadly, only 13% actually do anything about it.

You have nothing to lose

Our retirement review service is designed specifically to help you to make the right choice – and maximise the income you receive.

We take a detailed look at who you are, what plans you have and what can be done – and then seek out the best solution for you.

If you would like more information, call our office on 01554 770022 and we can discuss the benefits, without any obligation on your part. It will take only a few minutes – but could end up adding hundreds of pounds to your income just when you finally have the time to enjoy it.

1: NAPF/Pensions Institute, ‘Treating DC members fairly in retirement’ Feb 2012;

2: Association of British Insurers, ‘Annuity Purchasing Behaviour’, Sept 2010