The new pensions freedom of choice has given people far greater power over how they spend, save or invest their retirement pots in future. This has led to many questions and misconceptions arising:
Can I really cash in my whole pension fund and draw out all the money?
Yes; if you are aged 55 or over, you will be able to do this after 6th April.
Do I have to be retired to access my pension fund?
No, as long as you are aged 55 or over. If you are already over 55, you do not have to await until the 6th April to access your pension fund as you can do so already.
I won’t have to pay any tax, will I?
You will be able to draw up to 25% of your pension fund tax free but the residual fund will be taxed as income. For example, if you have taxable earnings of £30,000 per annum and cash in a pension plan valued at £80,000 you will receive 25% tax free (£20,000) and pay tax of £21,543 on the balance. This would reduce your £80,000 to £58,457.
Is there any way I can avoid or reduce the tax charge?
With careful planning, you may be able to reduce the tax payable – for example, you might withdraw your pension fund over a number of years to avoid or minimise any higher rate income tax. This is usually known as Drawdown. It is important that you plan any withdrawals very carefully to avoid paying too much tax – you could even lose your personal tax allowance.
Will my existing pension plan allow me to take full advantage of the new rules?
Not necessarily; whilst you should be able to draw the full value of your pension fund as a lump sum, you may not be able to do so in stages via Drawdown, as above. This is because many older pension plans are set up on old IT systems and they simply do not have the capability to facilitate Drawdown. Although these changes have been brought in due to new legislation, it does not force pension companies to pay funds from existing plans in this way. You may therefore be required to transfer to a new plan that will facilitate all of the new pension freedoms.
Can I still pay into a pension plan?
Yes, you will still be able to make pension contributions but the amount you can contribute (your “annual allowance”) may be reduced.
Could I pay into a pension plan and then draw it out straightaway?
In theory, this is possible but most pension companies will not offer this facility. Having said that, we have spoken to some pension providers who hope to be able to do so but you should expect to pay a charge for this.
Will means-tested State benefits be affected?
Yes, they could be. You should therefore check your personal situation very carefully.
I have heard there will be free advice?
The Government has promised that everyone will have access to free “guidance” via the Pension Wise service to help you understand what your choices are. However, it is important to be aware that this service will provide only general guidance and not personal advice. You should therefore seek personal financial advice from a regulated independent financial adviser.
Should I withdraw my pension fund?
Everyone’s individual situation is different but you should remember that a pension is designed to provide an income for you in retirement. With people living longer than ever, you could be retired for many years and you need to consider how you will survive if you spend your entire pension fund now?
Beware pension scams!
We expect to see a surge of high pressure telephone sale techniques and boiler room scams targeting the over 55s, many promising high investment returns. It is important that you deal with a regulated independent financial adviser and remember that if an investment sounds too good to be true, it normally is!
What should I do now?
You may wish to read our guide to the pension changes for some useful action points but as a starting point, please feel free to contact us to discuss your options.
In summary, these changes will give pension investors and retirees much greater choice and flexibility, making pensions an even more attractive choice for saving than ever before. However, you should be careful that you don’t fall foul of any of the pitfalls mentioned above.