The 2014 Budget saw the announcement of a revolutionary new approach to providing income in retirement, which came into effect on 6 April 2015. For the very first time, individuals are allowed to access money in their pension pots from age 55 without restrictions.
Why the change?
Prior to the change, pensioners were only allowed to use their pension pots to purchase a fixed income from their retirement age using an annuity. Reduced annuity rates as a result of low interest and gilt rates meant that pensioners were being forced to buy an income at a time when annuity rates were uncompetitive and gave poor returns. The manner in which annuities were treated on death was also a cause for concern, therefore changes were needed.
What are the new rules?
At the age of 55 the following choices are available:
- The pension pot can release 25% of the value on a tax free basis
- An income can be secured by using an annuity with the remainder of the pot but it is recommended that independent financial advice is sought to ensure that the income is maximised and takes all your circumstances into account. Your health may have a bearing on the amount you are paid
- An income can be drawn on a regular basis from the pension pot subject to the appropriate rate of tax being paid.
- The remaining pot of money will continue to be invested.
- Regular lump sums of money can be withdrawn but will subject to the appropriate rate of tax.
- The full fund can be withdrawn less tax at your highest personal rate.
- On death, the pot can be used to provide an income for the dependants or can be paid as a lump sum free of inheritance tax.
What has happened since the changes came into effect?
The pension providers, pension trustees and financial advisers were faced with a major challenge of how to utilise the rules, advise clients and prevent a massive misuse of pension pots through poor decisions by those entitled to access their money.
Buying luxury cars, exotic cruises and wild spending sprees were predicted but the savers, the providers and advisers have taken a sensible approach and advice should be sort and all the consequences of withdrawal need to be considered before action is taken.
Between April and June 2015 £2.5bn was paid out to people taking out an annuity or taking straight cash. 95% of those who took a lump sum took the full amount available to them. Many of these are thought to be people with a pension pot of around £20,000 who previously would have had to buy an annuity from which they would receive a few pounds per week.
However annuities have remained popular with some £900m put in during the first quarter since the changes. The average ‘pot’ has increased notably from £26,000 under the old rules to over £55,000.
WHAT IF I AM IN A COMPANY PENSION SCHEME?
If the scheme provides you with any guaranteed benefits then you will need to seek independent advice and obtain a full financial report which will indicate what your choices are and the risks associated with making a decision to move the pot so you can access your money.
If your employer pension scheme is a money purchase scheme then you will have an accumulated pot of money made up of yours and your employer’s contributions together with growth on the investment.
With this type of scheme you may be able to access some tax free capital and a taxable income but again you should seek advice from an independent adviser to ensure that you make the right decisions which are aligned to your pension income needs and objectives.
WHAT SHOULD I DO NEXT?
The changes to the pension rules and the introduction of ‘pensions freedom’ has further highlighted the need for advice to make sure your income and capital needs are managed to avoid paying unnecessary tax.
You should read the government website which will provide you with more comprehensive information regarding the above choices and if you are still unsure of the best option for you then seek advice from and adviser who will discuss your needs and objectives and develop a plan that will achieve them.
The Financial Management Centre has teamed up with Parkgate who will provide such advice and if you contact Keith Marshall on 07988 385155 he will arrange for a qualified financial adviser to contact you. Keith can also be contacted at firstname.lastname@example.org.