Today’s pension savers can enjoy far greater freedom over how they access their pension savings, but it could lead to some making wrong decisions and paying unnecessary tax.
That’s why it’s important to understand what the changes mean to you and take professional financial advice so that you can make the right decisions with your pension.
Power to the people
Since April 2015, people over the age of 55 have had greater power over how they take their retirement savings and more choice in terms of the options available. It’s now possible to:
- take your pension fund as cash in one go
- take smaller lump sums as and when needed, leaving the rest invested
- take a regular income
The latter could be via income drawdown, where you draw directly from the pension fund which remains invested, or via an annuity, where you receive a secure income for life. However, any withdrawals in excess of the tax-free amount will be taxed as income at your marginal rate.
So, if you are a basic-rate (20%) taxpayer, any income you draw from your pension will be added to any other income you receive, which could push you into the higher (40%) or even top-rate (45%) income tax bracket.
Choosing to take your pension out in stages, rather than in one go, could help you manage your tax liability.
Combining smaller pots
If you have multiple pension pots you may want to think about transferring them so that they are all in one place. This would make your pension savings easier to manage and you may benefit from more investment choice than the current provider offers. However, there could also be disadvantages like exit penalties or a loss of benefits. If you’re thinking of transferring an old pension plan please talk to us first so that we can help you make a fully informed decision.
Think about the long term
Although it might be tempting to take your whole pension pot at age 55, remember that the money has to last as long as you do. Calculating the right level of income to last you through retirement could be tricky; you don’t want to use up your money too quickly, or live more frugally than you actually need to.
So how long do you think your retirement income needs to last? According to Just Retirement’s longevity calculator, a 60 year old man of average health has a 50% chance of living to the age of 90, compared to a 60 year old woman with a 50% chance of living to 93.
Pension death benefits
Another important change (that perhaps hasn’t been as well publicised) relates to pension death benefits. Before April 2015 you could only pass on your pension savings to one of your dependants and keep them invested within the tax-efficient pension wrapper.
Under the new rules, you can now pass on the wealth built up through your pension savings to anyone you choose, with the funds still remaining within their tax-efficient pension wrapper until they are needed. The rules around how this works in practice can be complex, but in principle it means your beneficiaries will receive more of the wealth you’ve created because it won’t be eroded by taxation.
HM Revenue & Customs practice and the law relating to taxation are complex and subject to individual circumstances and charges which cannot be foreseen.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
If you’re looking to access your pension, or you’d like to understand what death benefits are available from your current pension provider, please get in touch.