1. 1. Pensions Freedom Day: Your Retirement Options after April 2015 explained By Lee Denham Star Financial Planning
2. 2. The Budget of 2014 announced almost unprecedented changes to how and when you can take your pension income. However, in spite of the comparatively long lead time before the rules came into effect this April, many people are still understandably unclear about their pension options, how they can access their pensions and the tax implications of doing so. The changes now gives everyone more choice as to how you can access your pension savings, whether you plan to do so at 55 or, perhaps more likely, later at 65, 70 or older. There are a now a number of Options for whatever you hope to do, be it retiring fully, or reducing your hours at work and topping up your income from your pension, with the flexibility of even mixing and matching these options. As ever, it is always valuable to discuss these options with your Financial Adviser who can guide you through them and ensure you not only make the correct options for you, but will ensure you are placed with reputable providers in order to secure you the best arrangement. However, for now, let's have a look at what they are:
3. 3. Option one: Do nothing for the time being
4. 4. You don't have to take your pension benefits at the age of 65, or at any other time you told your current Pension Provider. Waiting until you are older will mean you have the benefit of any further growth in your savings, with the potential of a getting a higher income at a later date. Another good reason to do this is that you can continue making savings into your pension. These will still be eligible for tax relief on pension savings of up to 40,000 each year (tax year 2015-16) until you reach 75. If you are thinking of changing when you opt to access your pension funds, dont forget to get advice about how much investment risk you are taking with your funds; most providers aim to put you in low risk funds the closer you get to your retirement date, so if you delay the potential for growth would be severely restricted. Conversely, if you retire early, your fund could still be too volatile and you dont want to risk a substantial loss this close to retirement. If you do want to make alterations to your pension, remember to check with your pension scheme provider in case there are any restrictions or charges for changing your retirement date, and the process and deadline for telling them. Also check that you wont lose any income guarantees by delaying your retirement date.
5. 5. Option two: Get a guaranteed income for life with an annuity
6. 6. If you just want the security of having a guaranteed income for the rest of your life, then buying an annuity could be your best option After you have taken a quarter of your pension pots your 25% tax-free lump sum, the remainder of your money must be used to purchase an annuity. This will give you an income until you die, the level of income being dependent upon your age at the outset, your health, whether you want the income to increase (in line with inflation) as you get older, or to provide an income for your spouse after your death. It is important that you select the right option here, as well as to shop around for the best rate, so it is important that your Financial Adviser assists you with this, for once an annuity is purchase you cannot change your mind*. (* the current Government are investigating ways this could be changed)
7. 7. Option three: Flexible Drawdown or Flexi-Access Drawdown
8. 8. With this option, once again you can take up to 25% of your pension pot as a tax-free lump sum, whilst the remainder is invested to provide you with a regular (taxable) income. Whilst you are able to choose the level of income you desire, it is always a good idea to work with a reputable Financial Adviser, as you wouldn't want to run out of money, as unlike with the option above with an Annuity, the income is guaranteed for life. Regular reviews to take into account your changing needs and investment performance (which can be good and poor) need to be undertaken to ensure the desired level of income is deliverable until you die.
9. 9. Option four: Taking occasional small cash sums from your retirement pot
10. 10. This option sees you basically treating your Retirement Pot like a Savings Account, withdrawing cash as and when you need it and leaving the remainder to grow tax-free. As with every option, the first 25% is tax-free and the remainder is treated as taxable income at your marginal rate. Once again, there is great skill required to do this to avoid the many pitfalls that may be in your way, specifically paying too much tax or paying the pension provider unnecessary charges for too many withdrawals throughout a year. Once again, working with a reputable Financial Adviser can help you avoid this.
11. 11. Option five: Withdrawing your entire pension pot as one lump sum
12. 12. There is now nothing stopping you from taking your whole pension pot as one lump sum of cash. However, care and specialist advice again is needed. Whilst the initial 25% of the withdrawal will be tax-free. The rest will be taxed at your highest marginal tax rate by adding it to the rest of your income for that tax year. You need to be very careful that most of this money isn't therefore taxed at the higher rate tax band of 40%, or more. There are many risks associated with cashing in your pension in one lump sum. Without very careful planning, you could run out of money and have nothing to live on in retirement, so it is important to seek good financial advice.
13. 13. Option six: Tailoring all your options to meet your individual needs
14. 14. You are not restricted to just taking one of the above routes - often the best way is to mix and match all the options, taking cash and income at different times to suit your changing needs and lifestyle, plus the hope that you will have a long and fruitful retirement. Since most people will live until their mid 80's and since many decisions made regarding pensions are irreversible, even if you subsequently realise you have made a mistake, this is an area where it pays to seek expert Financial Advice. A reputable Adviser will be able to demonstrate to you a number of different options, in various combinations, helping you understand how each one works and the implications of taking them. A number of factors would be considered, including:
15. 15. What date you plan to stop working, or if you will be going part-time. If reducing your hours at work, is this likely to be a one-off reduction, or a slow phasing out of working hours. The amount of income you want and your attitude to taking investment risk. How old and healthy you are. How much money you have accrued in pension pot and if there are other savings or pensions. How might your circumstances change in the future? Whether you have financial dependants. Perhaps most important of all though is that you must ensure that the person advising you on your pension is reputable, qualified and authorised to give advice; there is an industry-wide concern that anyone approaching the age of 55 could be vulnerable to pension scams which could see you lose your hard-earned savings. As a rule of thumb, if it seems too good to be true, then it normally is.
16. 16. If you want to discuss anything to do with your pension or retirement options, please do not hesitate to get in touch at: leedenham@starfp.co.uk. Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependent upon individual client circumstances and may be subject to change. The Financial Conduct Authority (FCA) does not regulate taxation and trust advice or legal advice investments recommended as part of tax and trust advice are however regulated by the FCA.