Once upon a time, your pension plan matured at 65, you took some cash and a monthly pension for life.
Over the years, the number of ways you can take benefits has increased significantly, offering opportunities for:
In addition, it doesn’t always make sense to take your benefits from your existing insurer- in most cases, an increase in benefits can be obtained via a transfer or the “open market option”, by moving your funds to another company.
But most people don’t have the knowledge or the patience to sort out this minefield of choices, and the wrong choice could cost you a lot of money in the long run.
However we can provide the necessary guidance to ensure that the decisions you make now- which you might have to live with for the next 30-40 years, are the most appropriate.
After you have worked hard all your life, saved for retirement for the last 30 or 40 years, another hurdle you will come across is which retirement option is right for you.
When retirement time arrives, choosing what to do with your saved money requires careful thought. For many, the decision is easy – replace your work income with a pension income. It pays to choose carefully and get the best advice so you get the most out of what is generally your longest investment.
Flexible access to pensions from age 55 – which comes into effect from April 2015
From April 2015, those of you who invest in pensions who are 55 or over will have free reign in relation to how you choose to take an income from your pension (including, if you so wish, taking the whole pension fund as a lump sum).
Typically, the first 25% of the pension withdrawal will be tax-free. The remainder being subject to income tax at your highest marginal rate – e.g. if you are a basic-rate taxpayer (20%), the income drawn from your pension will be added to any other income you receive (for example a salary), which could have the effect of moving you into the higher (40%) or top-rate (45%) income tax bracket.
It is of course possible to take your pension in stages, as opposed to one lump sum. Although we cannot give tax advice, it is possible that using a staged process may help you with managing your tax liability. Equally, you should be able to take the tax free cash immediately, subject to the age limit of course, and defer taking pension income until a later date if you so desire.
Restrictions on pension Income Drawdown abolished – which comes into effect from April 2015
An option available to those who invest in a pension is to, at retirement, take an income directly from your private pension fund. This process is called income drawdown. Presently, the Government Actuary’s Department (GAD) sets a maximum on how much can be drawn each year for those in capped Income Drawdown. This is commonly known as the GAD maximum.
April 2015 will see these limits abolished – meaning, as a pension investor, you can take as much as you would like from your pension.
Income Drawdown allows you to invest your pension where you choose, subject to the Pension Providers approval, and choose how much income you take. With this comes risk, for example it is possible that your fund may run out of money in retirement. Combinations such as poor investment performance and income withdrawals could see your fund reduce and, in the worst-case scenario, even see your fund run out of money. It is important to point out that Income Drawdown is a higher risk option, especially when compared to say an annuity where the insurance company takes the risk. With Income Drawdown, the responsibility to manage the fund and the income taken from it lies with you.
In addition to those groups outlined at the start of this document, if you are a pension investor in Income Drawdown prior to 6th April 2015, you will be able to move to the new unlimited regime, but you will be restricted on how much you can contribute to pensions in the future (the next section elaborates further on this).
New restrictions on contributions – which comes into effect April 2015
If, in addition to any tax free cash, you choose to take any income from your pension after April 2015, under the new rules you may still be able to make pension contributions, however this would be up to a maximum of £10,000 a year (e.g. a new reduced Annual Allowance). It’s important to point out that employer contributions and pension benefits in Final Salary schemes would be included.
Two exceptions are:
Those of you who have protection may wish to consider the implications of making contributions on your protection status.
Investors already in Flexible Drawdown before April 2015 will be positively affected as
you will be able to make contributions of up to £10,000 a year – whereas currently you are unable to make any contributions.
This will not affect you if you have not:
You will still be subject to the £40,000 annual allowance limit and current pension contribution rules.
Access to impartial guidance – which comes into effect for anyone taking retirement benefits after April 2015
The Chancellor, George Osborne, announced in his budget speech that everyone should have free guidance on their retirement options.
Confirmation has now come that this will be provided by organisations such as The Pensions Advisory Service (TPAS) or the Money Advice Service (MAS), and will be delivered by face-to-face, telephone and via web-based services.
Defined Benefit (DB) pension withdrawals – comes into effect April 2015
Anyone with a Defined Benefit scheme will be able to take advantage of the new rules and, should you choose to, make unlimited withdrawals. To enable this, you will have to transfer your Defined Benefit scheme into to a Defined Contribution pension (for example a SIPP).
Final salary benefits are very valuable and it is recommended that anyone considering this should first receive independent financial advice.
For those readers in a public sector scheme it is important to point out that it will no longer be possible to transfer from most of these schemes.
Retirement Age increase – from April 2015
The age at which you can start to draw your pension will change to 57 in 2028, and then will increase in line with the State Pension age (i.e. remaining 10 years below the State Pension age).
This does not apply to Public Sector Pension Schemes for Firefighters, Police and Armed Forces.
Tax paid when you pass on your pension – reduced? – last quarter of 2014
If you die before:
Your entire pension fund can normally be paid to your beneficiaries free of a tax charge
However, If you are:
Any lump sum paid to your beneficiaries is currently taxed at 55%.
Whilst this is still to be reviewed, the Chancellor believes this is too high and has advised that this will be reviewed later in 2014.
There are many factors to think about when deciding which route is right for you, some of these might be:
How big is my pension pot? Some options are only suitable for larger funds, also if the fund is only small, should you take it under triviality rules?
Do I have an adverse health issues? If you have had health problems in the past, are currently being treated for a health problems or if you are a smoker, then all of these could qualify you for an Enhanced Annuity.
Am I prepared to take some risk? Some pension options are linked to the stock market, so involve a degree of risk. Are you happy with the possibility of a larger pension fund due to stock prices rising. Similarly the fund could drop leaving you with a smaller fund value.
Which route is best for you? There are effectively 2 main routes of taking your pension. Either by taking an Annuity or by going into Drawdown.
Buying an annuity basically buys you an income for life. In exchange for your pension pot, you will get given an income which once started is set in stone. You cannot change it. This is good for people who do not wish to take on any risk whilst in retirement and like more certainty.
For a quick annuity quote, please click here: Annuity Quotes
Income drawdown allows you to choose the income level you wish to withdraw from your pension ranging from no income at all up to a capped maximum income. You choose where your fund is invested and should review and monitor the situation regularly. Anyone age 55 or above is eligible for income drawdown, but it is a high risk option so is not suitable for everyone. This is often used for larger pension pots but can be useful for people with small pension plans as well.
If you are approaching your retirement date, obtaining independent financial advice on which option is best for you may not only save you a fortune in the long run, but will also give you peace of mind knowing you made the best decision based on every option available to you. Please get in touch for Honest Effective Life Planning.
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