April 2015 pension changes
The government pension reforms that came into effect from April 2015, meant a number of changes to the way in which individuals can access and use their pension savings. For anyone considering retirement there is now a lot to think about; along with more choice and flexibility, there are other implications such as what tax you might pay, and making sure your money doesn't run out in retirement. It's important that you understand these changes fully, so you can plan how to finance your retirement in the way that best suits your needs and circumstances.
One of the biggest changes made means that anyone aged 55 or over can access their Defined Contribution pension funds however they choose. This includes taking all of it as a lump sum, or as a series of lump sums, along with more options on how to take an income in retirement.
Of course, such far reaching changes meant that pension providers faced many challenges in delivering this new flexibility, along with the promise of new products designed to meet changing retirement needs.
That said, pension providers still have a duty of care to their customers. This means that they need to be sure that you understand the implications of withdrawing your pension fund and have considered your actions carefully. Most will insist that you take advice before committing to any decisions, or ensure you understand the implications of not doing so. In other words, given the potential pitfalls, they need to be certain that you're making an informed decision.
So, whilst it hasn't been compulsory to purchase an annuity for some time now, the new pensions freedoms mean that individuals have total flexibility, and can choose how they take their income in retirement from a wide range of options. The following section summarises these options, and full details can be found in the Financial Products section.
Greater freedom, more choice
Thanks to the reforms, there are now a number of options from which you can choose to create your retirement income:
- Take some or all of the money as cash. The first 25% of any money withdrawn from your total pension savings is tax free. The remaining 75% will be taxable as pension income at your highest marginal rate of tax. Depending on your earnings for the year in which you make your withdrawal(s) this could mean that you become a higher rate tax payer, and 40%, or even 45% in some cases, becomes payable on some of your pension withdrawal.
- Invest some or all of the money into a drawdown arrangement. These are plans where your money is invested according to your needs and attitude to risk, and you are free to withdraw an income each year with no restrictions. Prior to the pensions freedoms changes, there were limits on the amount that could be withdrawn, but this has now been removed for new drawdown plans. As this is an investment product, you need to be aware that the value can go down as well as up which could affect how much income you can withdraw.
- Turn some or all of the money into an annuity. Annuities are still the only product that will offer a guaranteed income for life. They have also had some of their restrictions removed. This means that you can now select a guarantee period up to 30 years from some providers, while the taxation payable on death benefits has also been brought broadly into line with drawdown plans.
Getting the best value from your pension savings
What is important is to get the best value from your pension savings, so it's important that if you are looking to retire, you understand the choices and options available to you. To help, the Government have also introduced a guidance guarantee. Now anyone over 50 who has saved into a pension can access their free 'Pension Wise' service.
Designed to provide guidance information – not financial advice – it has been created to help you assess what pension policies you have, what you can do with them, and what the tax situation could be on your various options. Before speaking to them it's a good idea to get copies of all your most recent pension statements, including a State Pension Statement. This will give an estimate of the new State Pension, which will affect anyone who reaches State Pension age on or after 6 April 2016, and will be based on your current National Insurance contribution record.
The Pension Wise service is provided by the Department for Work and Pensions (DWP) in partnership with Citizens Advice and The Pensions Advisory Service (TPAS), and is offered online, over the phone or face to face at various locations around the country.
The advice you need for the retirement you want
While all of these organisations offer consumers a valuable starting point for their advice journey, they won't make recommendations on the right products for your unique situation, for that you need an adviser. Although this will involve a fee, the value of the advice they give can be immeasurable. That's because they take the time to look at your whole financial picture, covering tax liabilities, your risk appetite, and how to avoid running out of money. They can also carry out a review of any retirement products you may already have identified yourself.
Most importantly, they may also be able to suggest other options in funding retirement income that you haven't considered. If you don't have a professional financial adviser, you can easily find one near you though sites like thepfs.org or unbiased.co.uk. And you can find out why good advice is worth every penny by watching the helpful video on our advice and guidance page.