The most important shake-up for pension savers in decades is taking place this year. Under the current system, you don’t get much choice when it comes to accessing your pension. Around three-quarters of people purchase an annuity each year and anyone who wants to cash in the lot pays a whopping 55 per cent tax. In a matter of weeks this all changes.
What’s happening to pensions?
From the start of the new tax year on 6 April you get unrestricted access to your retirement savings, no matter how large or small your pension pot is. You don’t have to buy an annuity – unless you want to – and as long as you are at least 55 you can take out as much of your pension money as you see fit.
What type of pension do I need?
These new rules only apply to defined contribution (DC) schemes, also known as money purchase pensions, which are based on contributions that you and your employer make. They do NOT apply to defined benefit (DB) schemes or final salary pensions, which are based on your earnings and how long you’ve been a member.
Should I ditch my final salary pension?
The new flexibility and tax advantages of DC pensions are tempting but you risk losing valuable benefits if you transfer out of a final salary pension. They aren’t referred to as ‘gold-plated’ for nothing: they provide a guaranteed income after retirement and often come with additional perks such as inflation-proofing and pensions for spouses.
The government has said that anyone with final salary pension benefits of £30,000 or more must take professional financial advice first.
Do I have to retire to access my pension in April?
No. As long as you are over 55 it doesn’t matter whether you are still in work, about to retire, or already retired.
Do I still get my tax-free lump sum?
The 25 per cent tax-free lump sum will still be available and you don’t just get the one chance to take it. Instead, you can leave your pension fund invested and make as many withdrawals as you like, taking a quarter tax-free each time.
What about tax?
Anything above your 25 per cent tax-free lump sum is taxed as income, which could be nothing at all if you’re within your personal allowance (which is £10,500 for the 2015-2016 tax year), 20 per cent (basic rate), 40 per cent (higher rate), or 45 per cent (additional rate). Remember that any pension withdrawals are included as income so this alone could bring you into a higher tax bracket.
Can I cash in the whole lot?
Yes, you can take the entire pension pot in one go and spend it on anything you like. That could leave you with a big tax bill though. If you had £250,000 in your pension pot you get £62,500 as your tax-free lump sum and then you would pay around £70,000 in tax on the rest, according to financial advice group Hargreaves Lansdown.
Can I leave my pension invested?
Absolutely. You can leave the money invested in a drawdown product and access it over time as you see fit. Previously, you needed a certain level of guaranteed income from other sources if you wanted to take unlimited income from a pension in drawdown, but these rules will be swept away from April.
Can I still buy an annuity?
Yes. These insurance policies are still the only retirement products that offer a guaranteed income for life. Rates are still dismal, but you don’t have to use your entire pension pot to purchase one and there is a possibility that annuity providers will launch more flexible and attractive products in the future.
Will my provider be ready?
Possibly not. Pension schemes have never had to offer members bank-account style withdrawals before and although some of the biggest firms have said they are ready, there are concerns that others will struggle to offer full flexibility in time. If yours isn’t, you may be able to transfer to one that is, but that could be very expensive.
Should I consolidate my pensions?
If you’ve accumulated several pension pots over the years you may want to bring them together under one roof, particularly if any old schemes carry higher charges or are under-performing.
You can transfer them to your current company scheme or into a private pension scheme such as a SIPP (self-invested personal pension), which gives you greater investment choice. Check that you won’t lose any valuable benefits first (such as guarantees or protection for your dependents) and watch out for excessive exit penalties.
Is my pension taxable when I die?
Yes, but from April the current 55 per cent ‘death tax’ on income drawdown pension plans will be scrapped entirely if you die before reaching age 75. If you’re older, your beneficiaries will only pay tax at their own income tax level.
The government has also said that partners with joint life annuities will get that income tax-free if either one dies before age 75 (this is currently taxed as income).
What about the state pension?
The current system is being phased out from April 2016 and will be replaced with a new ‘flat rate’ pension worth at least £148.40 per week if you have a full National Insurance record.
The Department for Work and Pensions (DWP) has set up a new State Pension Statement service to offer anyone over 55 a free forecast of their expected state pension.
Will I get help deciding on my options?
Yes. The government has promised free and impartial ‘guidance’ through its Pension Wise service. The Pensions Advisory Service will provide this over the phone and online, and the Citizens Advice Bureau will offer face-to-face guidance. This is not personalised advice, so if you want that, you need to pay an independent financial adviser. You can find one through www.unbiased.co.uk.