Transcript of Pensions Freedom Day: Your Retirement Options after April 2015 explained
- 1. Pensions Freedom Day: Your Retirement Options after April
2015 explained By Lee Denham Star Financial Planning
- 2. The Budget of 2014 announced almost unprecedented changes to
how and when you can take your pension income. However, in spite of
the comparatively long lead time before the rules came into effect
this April, many people are still understandably unclear about
their pension options, how they can access their pensions and the
tax implications of doing so. The changes now gives everyone more
choice as to how you can access your pension savings, whether you
plan to do so at 55 or, perhaps more likely, later at 65, 70 or
older. There are a now a number of Options for whatever you hope to
do, be it retiring fully, or reducing your hours at work and
topping up your income from your pension, with the flexibility of
even mixing and matching these options. As ever, it is always
valuable to discuss these options with your Financial Adviser who
can guide you through them and ensure you not only make the correct
options for you, but will ensure you are placed with reputable
providers in order to secure you the best arrangement. However, for
now, let's have a look at what they are:
- 3. Option one: Do nothing for the time being
- 4. You don't have to take your pension benefits at the age of
65, or at any other time you told your current Pension Provider.
Waiting until you are older will mean you have the benefit of any
further growth in your savings, with the potential of a getting a
higher income at a later date. Another good reason to do this is
that you can continue making savings into your pension. These will
still be eligible for tax relief on pension savings of up to 40,000
each year (tax year 2015-16) until you reach 75. If you are
thinking of changing when you opt to access your pension funds,
dont forget to get advice about how much investment risk you are
taking with your funds; most providers aim to put you in low risk
funds the closer you get to your retirement date, so if you delay
the potential for growth would be severely restricted. Conversely,
if you retire early, your fund could still be too volatile and you
dont want to risk a substantial loss this close to retirement. If
you do want to make alterations to your pension, remember to check
with your pension scheme provider in case there are any
restrictions or charges for changing your retirement date, and the
process and deadline for telling them. Also check that you wont
lose any income guarantees by delaying your retirement date.
- 5. Option two: Get a guaranteed income for life with an
annuity
- 6. If you just want the security of having a guaranteed income
for the rest of your life, then buying an annuity could be your
best option After you have taken a quarter of your pension pots
your 25% tax-free lump sum, the remainder of your money must be
used to purchase an annuity. This will give you an income until you
die, the level of income being dependent upon your age at the
outset, your health, whether you want the income to increase (in
line with inflation) as you get older, or to provide an income for
your spouse after your death. It is important that you select the
right option here, as well as to shop around for the best rate, so
it is important that your Financial Adviser assists you with this,
for once an annuity is purchase you cannot change your mind*. (*
the current Government are investigating ways this could be
changed)
- 7. Option three: Flexible Drawdown or Flexi-Access
Drawdown
- 8. With this option, once again you can take up to 25% of your
pension pot as a tax-free lump sum, whilst the remainder is
invested to provide you with a regular (taxable) income. Whilst you
are able to choose the level of income you desire, it is always a
good idea to work with a reputable Financial Adviser, as you
wouldn't want to run out of money, as unlike with the option above
with an Annuity, the income is guaranteed for life. Regular reviews
to take into account your changing needs and investment performance
(which can be good and poor) need to be undertaken to ensure the
desired level of income is deliverable until you die.
- 9. Option four: Taking occasional small cash sums from your
retirement pot
- 10. This option sees you basically treating your Retirement Pot
like a Savings Account, withdrawing cash as and when you need it
and leaving the remainder to grow tax-free. As with every option,
the first 25% is tax-free and the remainder is treated as taxable
income at your marginal rate. Once again, there is great skill
required to do this to avoid the many pitfalls that may be in your
way, specifically paying too much tax or paying the pension
provider unnecessary charges for too many withdrawals throughout a
year. Once again, working with a reputable Financial Adviser can
help you avoid this.
- 11. Option five: Withdrawing your entire pension pot as one
lump sum
- 12. There is now nothing stopping you from taking your whole
pension pot as one lump sum of cash. However, care and specialist
advice again is needed. Whilst the initial 25% of the withdrawal
will be tax-free. The rest will be taxed at your highest marginal
tax rate by adding it to the rest of your income for that tax year.
You need to be very careful that most of this money isn't therefore
taxed at the higher rate tax band of 40%, or more. There are many
risks associated with cashing in your pension in one lump sum.
Without very careful planning, you could run out of money and have
nothing to live on in retirement, so it is important to seek good
financial advice.
- 13. Option six: Tailoring all your options to meet your
individual needs
- 14. You are not restricted to just taking one of the above
routes - often the best way is to mix and match all the options,
taking cash and income at different times to suit your changing
needs and lifestyle, plus the hope that you will have a long and
fruitful retirement. Since most people will live until their mid
80's and since many decisions made regarding pensions are
irreversible, even if you subsequently realise you have made a
mistake, this is an area where it pays to seek expert Financial
Advice. A reputable Adviser will be able to demonstrate to you a
number of different options, in various combinations, helping you
understand how each one works and the implications of taking them.
A number of factors would be considered, including:
- 15. What date you plan to stop working, or if you will be going
part-time. If reducing your hours at work, is this likely to be a
one-off reduction, or a slow phasing out of working hours. The
amount of income you want and your attitude to taking investment
risk. How old and healthy you are. How much money you have accrued
in pension pot and if there are other savings or pensions. How
might your circumstances change in the future? Whether you have
financial dependants. Perhaps most important of all though is that
you must ensure that the person advising you on your pension is
reputable, qualified and authorised to give advice; there is an
industry-wide concern that anyone approaching the age of 55 could
be vulnerable to pension scams which could see you lose your
hard-earned savings. As a rule of thumb, if it seems too good to be
true, then it normally is.
- 16. If you want to discuss anything to do with your pension or
retirement options, please do not hesitate to get in touch at:
leedenham@starfp.co.uk. Please remember any views or facts
expressed above are based on information received from a variety of
sources which we believe to be reliable, but are not guaranteed as
to accuracy or completeness. Any expressions of opinion are subject
to change without notice. None of the information should be
regarded as advice. Past performance is not a reliable indicator of
future results. Investing involves risk and the value of
investments and the income from them may fall as well as rise and
is not guaranteed. Investors may not get back the original amount
invested. Any tax treatment is dependent upon individual client
circumstances and may be subject to change. The Financial Conduct
Authority (FCA) does not regulate taxation and trust advice or
legal advice investments recommended as part of tax and trust
advice are however regulated by the FCA.