This year on 6th April the UK saw one of the biggest changes in pension arrangements we have ever seen. Changes in the way that you can access your pension pot as well as changes in what happens to your money if you pass away open up a range of new options. Much has been written about this in the press, and you may well have seen one of the many articles predicting pension disaster. Will we all be raiding our pension pots without a thought for the future to go on a cruise? Here at Active Chartered Financial Planners we think that Pension Reform represents a great opportunity, however this comes with a note of caution – it is more important than ever to make sure you have good advice regarding your pension.
Here’s a bit more about the key changes;
1. Pension Freedom
Until this year most people have had the ability to access up to 25% of their pension pot tax free upon retirement. As of 6th April 2015 this changed for those with most of the major “defined contribution” funds. These people will be able to access up to 100% of the cash in their pension pots. But beware, after the first 25% this drawdown of cash from your pension pot may well be taxable, or crucially, even if it is not taxable it may be taxed at source, leaving you with the need to reclaim the tax via Self Assessment (or whatever replaces this after the latest announcements in Budget 2015).
2. Death benefit taxation
Until now, for the over 75s, or for those under the age of 75 who have started to access the cash in their pension pot via drawdown arrangements, lump sum inheritance upon death has been taxable at the astonishing rate of 55%. This is now going to change. Whether you have touched your pot or not, if something happens to you before the age of 75, your beneficiaries will inherit your pension fund without any tax liability. Rules have also changed for those over 75, however this area remains extremely complex and if you are concerned, it may be worth taking advice.
But watch out…
- Many pension providers are still setting up the processes which will give customers proper access to their pension funds. There may be teething problems during the first few months of the tax year.
- Where you have a publicly funded final salary pension pot, the new pension freedoms will not apply.
- For some pension arrangements, in order to take advantage of the new freedom you will need to transfer the money first to a new policy before you can access the funds.
- The tax implications of accessing your pension pot are extremely complicated – you could find yourself facing an unexpected tax bill. Even if you aren’t liable for tax on the cash you withdraw from your pension, you might find that without the right planning tax is deducted, and you are forced to claim it back.
So will you spend now or spend later?
Until now the options upon retirement were fairly limited. Now, you can pretty much do whatever you want with the pension pot you have amassed during your working life. That means you really could access the whole pot and take off around the world when you retire. But with new freedoms come new risks. If you access your pension cash now, it will be important to have a good financial plan to ensure your security once the cash runs out. And given how difficult it is to predict the path our lives will take, who knows what your financial needs will be twenty years after retirement?
So what next?
The one point where everyone agrees is that the need for good advice in retirement is now greater than ever. So much so that the government originally committed to supporting this new legislation with free pensions advice for all (this commitment has gradually turned into free pensions guidance through Pension Wise). A skilled Pensions Adviser or Financial Planner will be able to work with you to understand the nuances of your financial situation and make recommendations which fit with your goals, risk profile and personal situation. We’d urge everyone, however near or far you are from retirement, to get a plan.