Pension Freedom

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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.

The Triviality Limit is £18,000? – Well, not always!

I’ve been helping a client recently, who was looking to draw the benefits from his personal pension plan.CII-Chartered Financial Planner gold copy

He was hoping to draw it all out in one go, sometimes known as using the Trivial Lump Sum or Triviality option.  His problem is that the fund was worth £18,700 – which is more than the Triviality limit of £18,000.

He had visited his financial adviser at his bank, and was told there was no way he could get the lump sum out as a trivial lump sum.  His only choice, he was told, was to take 25% as tax-free cash, and then choose an annuity for the rest of his life with the balance.  The income he was quoted was around £680 each year.

My client was not happy.  He was extremely disappointed that HIS pension fund would take roughly 20 years to be returned to him, and he didn’t know whether he was going to live for 20 years.  He wanted his pension NOW!!

Now, this is where it pays to see a good Independent Financial Adviser.

The bank adviser was correct in many ways, but failed to explore my client’s circumstances sufficiently.

The pension was with Legal and General, and it turns out the pension was in their Managed Fund.  Upon contacting Legal and General, I identified that the fund was indeed worth now £18,900.  Too high for a Trivial Lump Sum?

However, I enquired with Legal and General whether there was any point within the last three months when the fund was valued below the £18,000 Triviality limit, as the Managed Fund is known to be quite volatile and can fluctuate widely.  I also knew that in June this year, there was quite a sharp fall in equity prices.

As I expected, on the 26th June, the fund value fell to £17,790.  The following days it increased again to beyond £18,000.  What my client had not been told by his bank adviser was that he was permitted to use a ‘nomination date‘.  The nomination date can be used to identify a point when the Triviality rules could have applied.  Thankfully, my client used the 26th June as his nominated date.  The result is that he could use the Triviality rules, as he wanted initially.

The result is one happy client.   Just last week he had just under £16,000 paid into his bank account (after HMRC had taken their bit!).  The fund had risen to £18,900 at the date that he eventually claimed his benefits, and the Triviality rules permitted him to keep the growth in the fund beyond the £18,000 limit.

My client was overjoyed by the advice he had received.  My fee, for this work, for this client, was £295.00.  Good value for money for some sound advice.

I would like to point out that this article is based on all the information presented to me by the client, and the research I undertook on his behalf.  It is my professional opinion on the matter, and I would be more than happy to discuss any similar offers.

If you need advice on this or a similar matter, please give me a call on 01554 770022, and I will explain how I may be able to offer professional independent financial advice.

Trivial pension lump sum – take care!

When you reach age 60, it may be possible to withdraw your pension as a trivial lump sum.  That is, you can take the whole lot out in one go.

However, care needs to be exercised with this, as you need to be sure you are allowed to take the pension in one lump sum.

Here’s a specific example of a client who I met this week….

My client visited me to get my advice on how to fill in the forms to take out the pension in one go.  They had read that if you have a pension pot of less than £18,000 that you could withdraw the whole sum, having 25% paid as tax free cash, and the rest is added to other income for the tax year and taxed at your highest marginal tax rate.

All the paperwork was in hand, some of it filled out already before we met.  We started discussing their circumstances and I quickly identified that my client was already in receipt of an occupational pension of £8,000 per annum.

Unfortunately for my client, I advised they were not allowed to withdraw the pension under triviality rules, due to having other pension funds which also need to be included when calculating eligibility for a trivial lump sum.  The £8,000 pension must also be valued and included in the calculation (the £8,000 pension was valued at £200,000 for the purposes of the calculation!) .  For this client, we have to look at an alternative way of drawing the pension income, but they are still able to take 25% of the fund as tax free cash.

Had my client not taken my advice, they may have faced a HMRC penalty of up to £3,000 for negligently or fraudulently obtaining an unauthorised pension payment.

Therefore, it pays to take expert financial advice.

Jeremy Phelps is a Chartered Financial Planner at Financial Solutions Wales.  If you would like advice on taking your pension as a trivial lump sum, we can assist and take care of all the paperwork on your behalf.  Our fee for this is usually £199.