This means, crucially, that getting access
to pension savings need not wait until
retirement, although of course it will still
be an option to leave savings to grow until a
retirement date is reached. Indeed, for many
people, that will actually be the most sensible
option as pension savings are, by their very
nature, intended to provide financial support
through a long retirement.
But now there are plenty of other options,
too. First, some may find it useful to draw
upon pension savings long before they are
ready to retire.These days, people in the later
stages of their working lives can find things
getting a bit bumpy, with gaps in their pattern
of employment as they opt to reduce their
hours or change careers, which can leave gaps
in their income.The result can be cash flow
problems that make it hard to cope with the
costs of family living – school and university
fees, even mortgages. Now, if necessary, it
will be possible to take some money from a
pension pot to cover such contingencies – and
then, subject to certain limits, pay it back in
when a new job is started.
Now for the bad news: complete Pensions
Freedom could come with a tax cost. Under
the new regime, you will no longer be
restricted to taking only 25% up front as a
tax-free lump sum. Instead, you can choose to
take lump sums when you need them – with the first 25% of any
such payment paid tax-free and the remainder taxed at your highest
marginal rate.
While the reforms make the whole business of pension planning much
more flexible, they should not detract from the fact that pensions are a
long-term savings vehicle.Most people dramatically underestimate their
life expectancy: a 65-year-old man could expect to live for a further
18.6 years, according to calculations from the Office for National
Statistics; while a woman’s life expectancy at that age is even higher, at
21.1 years.A pension fund may, therefore, need to last a considerable
amount of time: the more you take out of it in a lump sum, the less that
will remain to generate an income in retirement.
The tax benefits attached to pension fund contributions have been
steadily eroded: the maximum annual contribution is now £40,000
and the Chancellor announced a further restriction in the Budget in
March, cutting the maximum amount that can be accumulated,
tax-free, in a pension pot to £1 million, fromApril next year.
But they are still generous enough to mean that pensions should
be one of the core savings vehicles for most individuals.The tax
concessions, combined with complete freedom to access your
money after 55, means that, for many people, it would make sense
to think of their pension as their main long-term savings vehicle –
or, at the very least, as one of the biggest components of their
long-term financial planning.
From now on, pension saving can be about
far more than just retirement – it can allow
almost complete flexibility in managing your
financial affairs later in life. Indeed, these
days, a growing number of people don’t really
accept the whole idea of‘retirement’ anyway.
Many have every intention of continuing
to work and to earn money – perhaps on
a part-time basis or in a consultancy role –
indefinitely. For them, and especially for those
who have accumulated large pension pots,
the most valuable opportunities now available
may be to do with drawing their pension
benefits more slowly.They’re now free to
keep some or all of their money invested in
their pension fund so that it has more time to
grow in value and not look to take an income
from it until their earnings are lower and the
tax implications are less horrendous. Pensions
Freedom is good news for them, too.
It’s important to be clear that the new
freedoms should only be considered as part
of a complete long-term financial plan. For
many, the most valuable freedomwill continue
to be, quite simply, the freedom to enjoy a
reasonable standard of living in retirement,
and to be able to live their lives without the
fear of running out of money.Over the years,
by far the most popular way to eliminate this
fear has been to convert pension savings into
an annuity, a financial product that can pay a guaranteed income for life.
Some commentators have suggested that Pensions Freedommarks the
‘death of the annuity’, but this is likely to be proved wrong – at a time
of ever-increasing life expectancy, the basic need for financial security in
later life isn’t going to go away. But in the new Pensions Freedomworld,
for those who can afford it, an annuity may be home for part of their
pension savings, rather than for the whole amount.
In summary, while Pensions Freedom is undoubtedly welcome,
opening more opportunities than ever before, it also adds extra layers of
decision-making to the process of retirement, and makes the decision on
how, and when, to take benefits even more complex.
Whatever your existing pension arrangements, plans for future
contributions or plans to take advantage of the new pension freedoms,
it is essential that you consider your options and their implications
carefully before taking any decisions. Before rushing out to use your
pension to buy a Lamborghini, as pensions minister SteveWebb alluded
to, you should seek professional advice.Whether you’re already well past
the age of 55, just coming up to that magic age, or still planning for it
from a long way in advance, it’s a financial issue that’s too important to
ignore – and, for once, in a good way.
SELLING AN ANNUITY
The Chancellor took the concept of Pensions
Freedom one step further with a proposal to
make it more attractive for those who have
already bought an annuity to sell it, generating
a lump sum.
While it is already possible to sell an
annuity, the tax charge of between 55% and
70%, makes it unattractive.
The government plans to reduce that tax
charge to an individual’s marginal rate – which
could be 20% or, for those with income below
the tax threshold, zero – and is consulting the
Financial Conduct Authority on guidelines for
implementing this from April 2016.
Those locked into low annuity rates may
think a sale is an attractive option. However,
the government has said it is ‘not minded’ to
allow the original provider to buy back and
cancel the contract.
That means sales are likely to have to be
made on the open market so the terms on
offer may not be particularly attractive. And,
while the tax charge has been reduced, it
could still be as high as 40%, or even 45%
for those paying the additional rate. Anyone
considering taking advantage of the freedoms
must seek expert advice.
Brad Wilson
08
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THE INVESTOR
IN YOUR INTEREST
PENSIONS
Balance sheet
With the recent changes to pension rules too important to ignore,
those looking to take advantage of the new flexibility to access their retirement pots
early will need to avoid any potential tax drawbacks.
