With the new tax year comes new pension freedoms. People who have worked hard and saved all of their lives, are now empowered to make choices about how they take the money they have accumulated in their pension plans.
You are no longer compelled to buy an annuity, but are offered more flexibility including the option to simply take the cash, all of it if you choose, when you reach the age of 55. For many this freedom will bring opportunities, but for others it will simply be seen as a real dilemma, when faced with what could be one of the most important decisions they will make in their lives.
There will be implications depending on what you decide to do, surrounding tax, making further pension contributions and whether the money will last as long as you need it to. So it is important you know where to go to get guidance. If you are close to 55, have already reached it, or are considering retirement, you should be thinking about your choices.
The new pension freedoms
Even if you don’t plan to give up work, from 55 you’ll be able to take a quarter of your pension pot tax free and with the rest you can:
- Buy an annuity. An annuity pays you an income for the rest of your life and despite the bad press annuities get, for many people this may still be a viable option. You should shop around to get the best price and an annuity that suits you. You may be able to get one that pays a higher amount if you have a health condition.
- Take a flexible income. Known as drawdown, this can be an option for those with larger pots. Your money will still be invested and you can pass on any remaining balance in your pot when you die.
- Take the cash. This might be seen as the simplest of the options but could have tax implications depending on the size of your pension pot. You could end up having a hefty tax bill to pay, as 75% of your pot will be taxable when you take it out as cash.
You can take a combination of these options or simply leave the money invested until you really need it. Your pension scheme might not offer all these options and in any case you don’t have to stay with your pension provider, you can shop around.
These new freedoms apply to ‘money purchase’ schemes, which can either be workplace or personal pension schemes. If you work for an organisation that provides a ‘final salary’ or ‘Defined Benefit’ pension scheme you will need to check if you can take the money out, and you may have to pay for independent advice from a financial adviser before you’re allowed to.
Get help before you leap
There has been a lot of coverage in the media recently about people planning to take all of their pension pot out in one go and investing it in schemes such as buy-to-lets or paying off their mortgage. For some this might be the right decision for their money, but may not be financially sensible for others.
To ensure you get free and impartial guidance the Government have set-up a new pension service called Pensionwise. You might have seen their advert on the TV. It offers a website www.pensionwise.gov.uk and either an appointment over the phone, or face-to-face, in one of 44 nationwide Citizens Advice Bureaux. They won’t be able to give you advice specific to your personal circumstances, you would have to get this from a financial adviser, but they will provide guidance, letting you know what the pension options mean for you. You will have to do some homework before you attend but this will ensure you maximise the opportunity.
It could pay to wait
Demand for the new Pensionwise guidance could be high in the early months, with research showing that over 92% of eligible consumers say they would use the service*. Product providers are also still working on designing innovative and suitable products, which are likely to be available later on this year.
So it could make sense to wait, assess your options and in the meantime watch out for pension scams; from fraudsters who may be trying to cheat you out of your pension pot, or encouraging you to participate in high risk investments.
*Chartered Insurance Institute ‘Guaranteed Guidance for retirement. What consumers want.’ Oct 2014.
This article is intended to provide information, not financial advice. Foresters Friendly Society do not offer advice. You should contact a financial adviser if you want financial advice to help you decide which the most suitable option is for you. They may charge you a fee for this advice. Tax rules might change in the future and depend on individual circumstances.
You can find out more about Foresters Friendly Society on their website www.forestersfriendlysociety.