Pension Advice
Pension freedom reforms have given over-55s the opportunity to take control of their retirement pots and spend, save or invest them as they wish.
The radical overhaul, introduced in early April 2015, allows retirees unrestricted access to their entire defined contribution pension pots. It removes the need for savers to buy an annuity – an insurance product providing income for life – unless they decide this is in their best interest. Instead, they can keep their pension invested and draw on it as they wish, or even withdraw all of it in one go. To take advantage you must be 55 or over, although most people will make the decision at retirement. This is a time when taking a cautious and measured approach is very wise. People close to or over 55 can get free guidance from the Government’s Pension Wise service and many would benefit from paying for good independent financial advice.
New pension freedom choices
The restrictions of the past have been removed and now people have much more choice in how they use their defined contribution pension pot. These take contributions from employees and employers, or funds saved into a personal pension, and invest them to provide a pot of money at retirement.
Take an annuity to get a guaranteed income for life
You can take up to a quarter of your pot as a one-off tax-free lump sum then buy an annuity with the rest. The annuity will give you an income for the rest of your life and potentially provide an income for your spouse and death benefits for other loved ones if you die. People who smoke or are in ill health generally qualify for an enhanced annuity with a higher income.
Flexi-access drawdown
You can release up to 25 per cent of your pension pot as a single tax-free lump sum, before re-investing the rest and taking a taxable income from it. You decide how much income you want to withdraw. Unlike with an annuity, there are no income guarantees, so you need to manage investments carefully.
Take cash lump sums
This new option means you can take money from your pension as you choose and have 25 per cent of each payment tax-free. Those are officially called uncrystallised funds pension lump sums. You can use your pension pot to take cash as and when you need it, leaving the rest invested to hopefully grow. Only the first 25 per cent of each withdrawal is tax-free. The rest will be charged at your income tax rate. Withdrawals are added to your other income to decide this rate.
Take your whole pot as cash
You could simply cash in your whole pot. The first 25 per cent will be tax-free and the rest is counted as income and will be taxed accordingly. Be aware that taking a big pot can push you into the higher rate tax bracket.
Mixing your options
You don’t have to choose just one option. You can mix and match - perhaps using some of your pot to buy an annuity and some to keep invested and take as cash lump sums.
What you need to watch out for
Some pension companies have more than 20% of their policies with guaranteed annuity rates
There are risks to this newfound freedom. Without careful planning you could run out of money and have nothing to live on in retirement. Another consideration is tax. Pension withdrawals are treated as income by the taxman. Releasing too much of your nest egg at once could push you into a higher tax bracket. Not all pension schemes will offer every option – the changes are fresh and it is taking time for some providers to catch up. Be sure to consider financial advice. Your first port of call should be Pension Wise, the free, impartial, government-backed service. For many people speaking to a good independent financial adviser is also wise. They will be able to help you choose the right strategy, avoid making mistakes and unearth any valuable guarantees that you may have in old pensions. You will have to pay for an adviser’s time, but that money could secure you a higher income for every year of the rest of your life. This special feature has been brought to you by Mail Finance in association with This is Money and Better Retirement. Better Retirement Group Limited is authorised and regulated by the Financial Conduct Authority number 153420.