As advisers, we have had to contend with clients pushing back on the issue of pensions, saying charges are too high, they can’t access their money or they don’t wish to buy an annuity.
However, in last year’s Budget, Chancellor George Osborne’s freedom and flexibility reforms mean savers now have far greater access to their pension savings than ever before.
The changes were simple, but powerful: starting from this April, a saver is permitted to take up to all their pension savings as cash from the age of 55. Yes, all of it.
Though these reforms provide great opportunities, there remain important matters to consider.
Only 25 per cent of the pension fund is ever going to be tax free – and that may be reduced under a future government. Withdrawing large sums of cash in a single tax year could affect your tax coding or leave you with a large tax bill.
Greater flexibility means more choice – and this can be daunting at the best of times. Although all savers are entitled to free impartial guidance – it’s called the guidance guarantee and will be available from Pensions Wise, created by the government – it may not be enough.
If you wish to withdraw money from a final salary pension, the regulations state you must take proper, regulated advice.
Unless you have a very simple pension arrangement or few other assets, such as a house, ISA savings – and let’s not forget debts – taking advice which is tailored for your specific situation may even be recommended to you.
The retirement age of 55 is also going up to 57 in 2028 and then, in line with the state benefit age increases, working lives are going to be extended to take account of this.
One of the greatest freedoms the changes have introduced is the ability to pass on your pension saving to the next generation. This only used to be possible if you had taken neither income nor tax-free cash and died before the age of 75.
Now if you are unfortunate to die before 75, your beneficiaries can either take the whole thing as a tax-free lump sum or draw a tax-free income.
If you wish to withdraw money from a final salary pension, the regulations state you must take proper, regulated advice
If the saver dies after 75, the beneficiaries can still take it as cash – subject to 45% tax for the next tax year, though this may change from April 2016 to the saver’s or their beneficiaries’ marginal tax rate over time.
Or the beneficiaries can take income through an annuity or income drawdown arrangement or else lump sums via income drawdown – all at their or the deceased’s marginal tax rate.
The reforms even offer greater choice to those who buy annuities in the future. Now on death, the fund doesn’t get swallowed by the insurer, but is transferred to a spouse or dependant, retains guarantee periods and income is tax free on withdrawal if you die before age 75.
Pension savings is now about more than simply providing you with a future income, by taking account of those you leave behind.
Over the 50 years to 2010, the average life span increased by around 10 years for a man and 8 years for a woman – that’s 85 and 89 years of age respectively.
That’s more than three decades of retirement if you are lucky enough to retire at 55 – it’s something to celebrate, but also start planning for.
The vast majority of savers may never need more than the basic guidance, but consider whether your own circumstances will be satisfied by that before making any decisions about your financial future.
At Price Bailey, we run a one-stop shop for our clients, where a substantial amount of their money is held within pension products.
Our advisers place the client’s future ambitions for income at the heart of what they do. We provide a joined-up service that combines our financial planning, tax and investment management expertise into one service, and one fee.
For more information please contact
James King on 01279 755888
Price Bailey Private Client LLP is an appointed representative of PB Financial Planning Ltd which is authorised and regulated by the Financial Conduct Authority. This article is intended for general information purposes only and should not be taken as advice in any way.