Flex your new pension freedoms with care
Wednesday, April 22, 2015
The much-heralded new rules came into force this April, giving you greater freedom around how you access your Defined contribution (DC) pension pot. Here's a plain English guide to the new rules, and their potential catches, to help you take full advantage of the new flexibility.
These are the key changes:
1. Freedom to withdraw as much or as little from your pension as you like.
This might appear to be a simple option, however there can be tax implications. If you choose to take cash out, the first 25% of your pension pot can be withdrawn tax free, but the remaining 75% will be taxed as income when taken out as cash.
2. Removal of the requirement to buy an annuity.
You can secure a guaranteed income for life with an annuity if you like. 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.
3. More generous death benefits.
The old rules were complicated and included a potential tax charge of up to a whopping 55%. From 6 April 2016, if you die before age 75 anything remaining in your pot is tax-free: if you die after 75 the recipient will pay income tax on it when they access it. The rules around who you leave it to have also been relaxed, letting you pass it on to anyone including children or grandchildren if you like.
4. Free impartial guidance from the government's Pension Wise service.
Anyone approaching retirement will be able to have a telephone or face-to-face session through The Pensions Advisory Service and Citizens Advice. This will look at your pension options, considering everything from how you might like to take your retirement income to how it'll affect tax and benefits.
However they will not be able to provide advice on which option is suited to your situation, which product or provider is best, or how to invest your money. You should contact a financial adviser if you would like pensions advice, and you may have to pay a fee for this.
But, while these new rules provide heaps more flexibility when it comes to your pension, there are risks…
• No restrictions, no pension left
This is the one everyone's talking about. The removal of restrictions on how much you can take from your pension pot won't necessarily mean we all dash off to buy a Lamborghini - as Lib Dem pensions minister Steve Webb commented* - but drawing out too much money could mean a hefty income tax bill or, worse, your pension pot not lasting as long as you do.
To avoid these potential catches, consumer champions Which? recommends taking advantage of one of the impartial guidance sessions with Pension Wise when you're approaching retirement. This will outline your options to help you make informed decisions about funding your retirement.
Which? have also launched a free guide to help you make the most of this session.
• Get rich quick rip-off
Unfortunately, it's not just people who've saved carefully into their pension pots that are thinking about taking advantage of the new rules.
Being able to take out as much money as possible means the opportunist scammers are looking at how they can benefit too. Unfortunately just a whiff of all this extra cash has lead to an increase in the number of cold callers offering pension reviews and get rich quick investment ideas.
Thankfully, the pensions industry is on it. The Pensions Advisory Service and the Association of British Insurers have launched a campaign to make people aware of the risks and consequences of these scams.
Among the warning signs it highlights are offers of free pension reviews, immediate access to cash from your pension and accessing your pot before you reach age 55.
The old adage 'if it sounds too good to be true, it probably is' is worth considering in these situations, but if you're in any doubt about an offer you receive, contact one of the Pensions Advisory Service experts or call 0300 123 1047.
But, while there may be some crooks looking to catch you out, being smart and understanding the new rules will help to ensure you can take full advantage of the exciting new pension environment.
Tax rules may change in the future and depend on individual circumstances.
This blog is intended to provide information, not financial advice, to help you make an informed decision. We do not offer financial advice. You should contact a financial adviser if you want financial advice. You may have to pay a fee for this advice.
*Source BBC Election 2015 News