A New Pensions Era: Freedoms and Responsibilities

The new pension freedoms planned for April will provide unprecedented freedom to choose  how and when to take benefits.  There will be much fewer restrictions on how to take benefits and there is no requirement to buy an annuity.  The abolition of the high 55% tax charge on death also means that beneficiaries look set to inherit more.  Although there will still be a death tax charge on pension pots for those over 75.

The new freedoms however will inevitably bring a few problems.  Firstly,  A recent survey conducted by the International Longevity Centre found that almost 70% of respondents aged 55 – 70 actually favoured guaranteed incomes over ones that rise and fall.   The survey also found that many people hadn’t planned towards their retirement and that often they didn’t intend to take any advice.

I think the first observation is that the press and the media have demonised annuities, however, for a considerable number of people an annuity might still be the most suitable product.   This is particularly true if you have a low risk threshold, a limited amount of assets and limited income sources.  For many people, just the security of a guaranteed income for life is the most important factor and they don’t want to contemplate the prospect of running out of income in their later years.  It’s important to remember that every individual has different requirements and that press comment doesn’t necessarily mean that an annuity is no longer suitable.  Depending on your circumstances it may still be the most suitable choice for many as evidenced in the survey results.

With these new changes it is surprising that many people still don’t undertake any planning and aren’t looking to get professional advice.  This is a very important and now very complex area of planning and therefore experienced, professional advice is important especially if you have built up a large pension pot.

The new pension freedoms (available from April 2015)  mean that you can effectively access all your pension pot.  However, there are some important issues to consider.  Firstly, those who chose to take their benefits early and access all the pot may need to think about how long they will need this income.  Life expectancy is high and increasing and therefore your pension will need to work very hard to provide for you.  Metering out pension pots to ensure a financially secure retirement requires astute long term planning.  Even those with large pension pots may find that annuities have some place in their planning. The need for professional advice has never been higher.

Whatever stage of your working life that you’ve reached  it is good practice to keep your pension plan under regular review and ensure that you keep contributing to your pension.

April 2015 changes

Flexible access to pensions from age 55  (this will rise to 57 from 2028)

You will be able to receive 25% of the fund tax free but you won’t have to take it in full at outset

Pension drawdown restrictions relaxed

Final salary pensions can be switched to defined contribution (unfunded public sector schemes are not allowed to transfer)

Death benefits can be paid to beneficiaries not just dependants  and will be tax free on death before age 75

Death benefits after age 75 will be subject to 45% and then the beneficiary’s marginal rate from 2016/17

Withdrawals from drawdown plans (after tax free cash of 25%)  are subject to the policyholder’s marginal tax rate

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