How ‘free’ will you really be to cash in your pension?
Experts warn that savers may have to switch to enjoy Chancellor’s reforms
THOUSANDS of savers may not be able to take advantage of new rules from April allowing them to cash in their pensions at the age of 55. Most savers have until now only been able to take a quarter of their fund at this age as a tax-free lump sum. The rest had to be preserved to provide an income in retirement.
George Osborne announced new pension freedoms in last year’s Budget. From April 6, there will be no restrictions on how much you take from your pension, nor what you spend it on – giving people the opportunity to use these savings to clear debts, invest in property or even pay for the holiday of a lifetime.
But savers should not assume they will automatically be able to use their pension fund like a bank account. Many providers will not have the systems in place to offer this flexibility by then, while others are expected to take a commercial decision not to let their customers access this cash at all.
Alan Higham, retirement director of investment company Fidelity, says: ‘ Pension providers aren’t obliged to offer these new pension freedoms.
‘There might be a number of reasons why pension firms don’t want to let members cash in these funds. Those running company pension schemes might be concerned that if people spend their savings they might not be able to afford to retire. Some pension providers might prefer it if their customers bought expensive annuities instead.’
This does not mean these customers are trapped completely, but they will have to switch pension providers if they want to take advantage of the new rules. This may take months to complete so experts are urging people to start the process now.
Evidence suggests there will be a spike in people looking to access these funds. According to over 50s financial provider Saga, an additional £1.5billion will be withdrawn from these savings plans next year; while research from Fidelity suggests transfer levels will be 10 to 15 times their normal levels.
‘Most systems creak under increased levels of demand,’ says Higham. ‘Customers need to start this process now.’
Tom McPhail, head of pensions research at fund broker Hargreaves Lansdown, says: ‘Transfer delays could certainly run into months, given the number of people looking to take advantage of these new rules. Anyone looking to take their pension benefits in April or May would be well advised to start work on it now.’
The first step is to find out whether your current pension provider will be offering these new pension freedoms. Smaller company pensions and older insurance-based schemes are less likely to offer this full flexibility.
Ros Altmann, a leading pensions expert and campaigner, says: ‘Many pension firms will simply offer the option of taking tax-free cash and buying an annuity. If you want any- thing else you’ll have to move your money elsewhere.’
Before switching, check you are not giving up other valuable pension benefits. Some older pensions offer ‘guaranteed’ annuity rates, which are typically far more generous than those offered today, sometimes a rate of as much as 10 per cent or more. These could be worth far more than the face value of the fund.
Some schemes also offer enhanced tax-free cash limits. Although new ‘freedoms’ allow you to take more cash, only a quarter of the fund can be taken tax-free. Savers will pay income tax on withdrawals above this amount. Similarly, savers should ensure they are not losing valuable life insurance or a spouse’s pension if they move their money out of a company pension scheme.
As well as checking the small print of your current pension, think about where you will move this money. Look at charges on different pension options and plan how you will invest the remainder of your pension fund.
Patrick Connolly of independent financial adviser Chase de Vere says: ‘There are a number of questions savers need to ask themselves before taking money out.’
These include whether there will be sufficient funds left to provide an income in retirement. If savers have a decent company pension scheme, for example, they may feel more comfortable cashing in a smaller private pension or taking a chunk from it to pay for a holiday or a new car.
If this money is needed to cover day-to-day living expenses, then savers may want to leave these funds invested for the future.
Those with so-called ‘gold-plated’ final salary (or career average) pensions should be extremely wary of transferring out of these schemes simply to take a larger cash sum.
These workplace schemes pay a pension linked to earnings that typically rises in line with inflation. It would be very expensive to buy a similar pension on the open market.