Commencing in April 2015, described as nothing short of a revolution the pensions landscape has been changed forever with more options and greater tax benefits for those over 55.
- Does it apply to all pensions?
- Do I need to transfer and what does it cost?
- What are ‘Safeguarded Benefits’?
- Why must I pay for Financial Advice?What is the maximum I can take out my pension?
- Are their different ways I can withdraw my fund?
- What tax will I pay?
- When do I have to buy an Annuity?
- What happens when I die?
- The changes in graphical terms
- Risk Warnings – please read
Does it apply to all pensions?
No. You may only access your pension fund with maximum flexibility from what are known as Defined Contribution (DC) schemes, usually via a type of pension known as Flexi Access Drawdown. You will need to check with your existing pension provider if they will allow you to exercise pension freedom within your existing contract.
Do I need to transfer and what does it cost?
If your existing provider will not allow you to exercise pension freedoms you will need to transfer into Flexi Access Drawdown and in most cases you will need to instruct a Financial Adviser to do this for you who will charge you for undertaking this for you. Charges vary , they are usually levied as a percentage of the amount of your Pension fund and can be anything from 2%-6%, for example if your pension fund is £100,000 you could pay a £3,000 fee to transfer into Flexi Access Drawdown. For smaller amounts, say pension funds of less than £30,000 very often a fixed fee will be applied of £1,000 – £2,000.
What are ‘Safeguarded Benefits’?
Anything that provides you with some form of guarantee or benefit that could be lost on transfer, so that could be the certainty of a pension income from a Defined Benefit pension scheme, a Guaranteed Annuity Rate or death benefits.
Why must I pay for Financial Advice?
The Government made it a part of the new Pensions Regulations that anyone with Safeguarded Benefits of £30,000 or more must seek Independent Financial Advice before being permitted to transfer – and with good reason, these are valuable benefits that should not be given up without careful consideration. Your existing pension provider will not transfer your funds until they are in receipt of confirmation that you have received Independent Financial Advice.
What is the maximum I can take out my pension?
There is no maximum, you can withdraw 100% of your fund as a cash sum if you wish.
Are their different ways I can withdraw my fund?
Yes. With Flexi Access Drawdown 25% of it will be tax free, the remaining 75% will be taxable as earned income. You do not have to take it all at once you could take your tax free cash in stages varying the amount you take as you chose. Alternatively you can withdraw your pension fund as a series of slices (known as Uncrystallised Pension fund Lump Sums) where each slice is 25% tax free, the remainder being taxable. As there are tax implications you should always discuss your situation with your Financial Adviser before making withdrawals to ensure you opt for the most tax efficient route.
You can of course use all or part of your fund to purchase an Annuity at anytime if you would prefer the security of a guaranteed income.
What tax will I pay?
You will pay tax at your marginal rate, any withdrawals aside from your 25% tax free cash are taxed as earned income and taxed at source so you need to be very careful that any withdrawals don’t carry you into a higher income tax bracket.
When do I have to buy an Annuity?
Never. To quote the Chancellor of the Exchequer “No one will have to buy an annuity.”
*George Osborne. Budget Speech 19.03.2014
What happens when I die?
There are various permutations dependent upon your circumstances at the time of death, If you are drawing down you fund and should die prior to age 75 your beneficiaries would have the choice of:-
- Receiving the fund in full with no tax charge.
- Continue to take income payments in Flexi Access Drawdown.
- Purchasing an annuity.
If you are aged 75 or over when you die your beneficiaries will pay tax at their marginal rate.
The changes in graphical terms
Risk Warnings – please read
IMPORTANT RISK WARNINGS FOR Flexi Access Drawdown
- High income withdrawals may not be sustainable and you could run out of money in retirement
- Taking cash today to fund short term needs could seriously jeopardise your standard of living in retirement .
- Taking withdrawals will erode the capital value of the fund. Especially if the investments returns are poor and a high level of income is being taken. .
- The investment returns may be less than those shown in the illustrations.
- The returns you require to satisfy your income needs may demand a higher risk investment strategy than you wish to take.
- You may not have sufficient other assets to provide you with an income if you withdraw substantial amounts from your pension fund
Pension Freedoms will be unsuitable for the majority of people, taking money from your pension fund prior to normal retirement age will mean a smaller income when you come to retirement. You should carefully consider all other options available to you before embarking on pension release and discuss it in detail with those closest to you who may be affected financially such as your Spouse or Partner. The consequences of your action could have a detrimental effect on your income and those closest to you for the rest of your lives.