THE NEW PENSION FREEDOMS!
Since 6th April 2015, anyone aged 55 or over has been able to take their entire defined contribution pension fund however they want…
These radical changes have totally changed pensions and given massive flexibility in terms of how we choose to receive our pension – we can now take it all in one lump sum, receive it as an annuity as before or do a mix of both… That’s why the new rules are frequently referred to as pension freedoms!
This decision has allowed most pension plan-holders to draw down as much or as little of their pension at any time. Effectively, we are now free to shop around and devise a multitude of product combinations – even taking it all as cash! However, whilst retirement freedom creates more choice, it can also bring with it more risk…
Q. Why has the government chosen to change the rules now…?
A. These government changes are in response to a huge change in worldwide demographics – we have an ageing population where people are living longer and in the near future there will be more people who are in retirement and claiming their pension than there are actually in the workplace.
The problem is that state pensions are funded by the taxpayer, so unless the government made changes that incentivised people to invest money into their pension and save for their future, either the tax payer would have to pay increased tax to fund pensioners or pensioners would have to receive a reduced pension. Neither of which would be popular options, so now with the new rules, the onus is on the individual to take responsibility for their retirement planning and the government is incentivising people to invest in their pension with attractive tax breaks on contributions etc. In short, pensions have now become a glorified saving scheme with fantastic tax efficiencies that have great flexibility for the consumer.
Q. What is the average retirement age in the UK?
A. On average men retire at 64 and women at 63, according to the latest report on retirement by Old Mutual Wealth. At these ages men can expect to live until 86.3 years and women until 86.9 years. Being retired for 21 years or more means planning for an income that funds your retirement for this length of time.
Q. What is different about pensions today since 6th April 2015?
A. In the past most people were put off investing their money into a pension scheme because of the poor returns… Traditionally, when you retired they didn’t provide enough money and if you died, the insurance company kept all the money you had paid into the scheme over your lifetime and your children weren’t able to inherit it. Not surprisingly most people invested their money elsewhere, into property for example.
The new legislation offers increased flexibility in terms of how you draw your pension and actually incentivises you to save by offering tax breaks and allows your children to inherit your remaining pension fund, which makes investing into your pension a much more attractive prospect.
Q. What are the new options in terms of how we can take our pension?
A. The first 25% of your pension pot will be tax-free, either as one lump sum or as the first 25% of multiple lump sums.
You can now choose whether you receive your pension as:
1. Uncrystallised Funds – ie. A Pension Lump Sum
These funds are ‘uncrystallised’, as they have not yet been used to pay a scheme pension, buy an annuity or designated to a flexi-access drawdown fund. As it stands, your pension pot would remain as currently invested or can be taken partly or all, as cash.
Historically, three-quarters of the 320,000 or so people that retire each year opted for an annuity, which offers a regular guaranteed income. For many people this certainty of payment may mean that it’s still the best option, but since the changes came into effect last year it’s increasingly less popular.
3. Flexi-access Drawdown
At the other end of the scale are “drawdown products”, which could potentially offer a better return but do come with a higher degree of risk, as you’ll still be investing in the stock markets, etc.
4. A Combined Solution
The likelihood for many is to opt for a mix of immediate cash, annuity and flexi-access drawdown – thereby meeting current needs, delivering a guaranteed income for life, yet also leaving some funds invested in the hope of future growth.
Q. How can I be sure I’m being advised by a qualified pension advisor?
A. The new regulations make it essential to ensure you are speaking to a pension advisor who is fully up to date. The standard qualification is the R04 certificate and the update is an R08. However, it makes sense to speak to a financial advisor with the highest pension qualification – either an AF3 or a G60, otherwise your advisor will be limited in the advice they can give you. Naturally, at Harris Begley we have specialist advisors who are fully qualified to advise our clients.
Contact us on 01736 366550 or email firstname.lastname@example.org to book your free, no obligation initial appointment to see one of our pensions advisors.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.