In the Budget 2014, the government transformed the way individuals could save into pension products and then access their funds at age 55. Until then, most pension rules had been geared to protecting the funds and preventing them from being fully withdrawn by the use of penal taxation]. From April 2015 that has all changed and you now have what has become known as 'Pension Freedom' - and there is a new recognition that these funds are 'your' hard earned savings and you have the right to do what you want with them.
From April 2015 you are able to withdraw your funds from a defined contribution pension (one based on the amount you paid in and not on your final salary) at any time after age 55. Most of you are still entitled to take up to 25% as a cash lump sum without incurring further tax, but anything above it is taxed as income and subject to your marginal rates of tax. A further benefit from the new rules is that should you die before age 75, the pension pot can continue to grow tax free and be accessed in whole or part by your nominated beneficiaries like a bank account. Doesn't that all sound great?
Well the catch is simple- you are likely to live for many years after the age of 55 and these funds have to look after you and give you an income- with better health treatments that could even mean for another 55 years. The new State Pension will provide a basic income once you reach your designated state retirement age but that isn't until you are between 65-70, depending on your age now, and who knows about the future! Are you confident you know enough about investing money for income and growth to ensure you can maintain the standard of living you want for the rest of your life? If you get it wrong can you live on the new State Pension (likely to be £148.40 per week flat rate 2016/17)
You need to decide how much you want to retire on, how much you need to save now and in the future, what to do with your old pensions (including tracing older lost ones), whether you should invest in your company scheme and when it might be best to transfer your schemes to get the best returns- and that is all before you retire.
At retirement? You will need to know whether to draw down all or part of your pension savings, how best to reduce any tax liability, how you might be able to get further pension benefits, whether you withdraw everything immediately and invest it (Immediate Crystallisation), whether you phase the withdrawal to get best tax position (Phased Withdrawal), whether you leave the funds in a pension scheme and take an income (Flexible Income Drawdown), whether you buy an annuity (Fixed, Temporary, Escalating) and with all of these options you will need to decide on how to look after your spouse and family if you aren't around.
These are often known as Final Salary schemes as they are based on a promise to pay you an income at retirement age from either a Funded scheme (where money is actually put into the pot) or an Unfunded scheme (Civil Service, NHS etc- where pension income is paid from ongoing contributions to National Insurance). These schemes do not benefit from the new pension rules unless you transfer them into a suitable pension product. [If you are in the latter then from April 2015 you will probably be prevented from transferring them at all. If you are in a funded scheme then you will need to consider very carefully whether you give up the relative security of the scheme or you transfer the funds. This decision should never be made lightly as you will lose some valuable guarantees.
The government has promised that they will provide guidance for everyone reaching retirement age- known as PensionWise- and this will be available from 2015- it is a free and impartial service to help you understand your options. But is that going to be enough? We don't think so- as you will need to plan your approach long before 55 and then you will benefit significantly from advice on what to do from then on.
AHFS is a national advice business which has a number of Chartered and Specialist Pension Advisors. We can help you plan for retirement, advise you on best course of action at retirement and will then work with you after your retirement to invest the funds to generate the long-term income you need. We can also advise you on other important financial aspects that you will be thinking about later in your life, like how to pass on your estate tax efficiently, how to utilise savings for long-term care and how to make the most out of all your savings when you most need them.
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