From April 2015 new rules will apply to private pensions. From the age of 55 you’ll be able to take responsibility for the money you’ve saved and access your pension pot however you like. You might want to:
One of the options when it comes to what you do with your pension savings is to buy an annuity. There are a number of different types but they all pay a guaranteed, monthly, quarterly or annual sum until you die or for a fixed amount of time (“guaranteed period”).
You can access your pension savings as and when you like, taking however much money you want.
With flexible access to your pension pot, you could:
You can take your entire pension pot at once from age 55. This gives you total control of your money and 25% can be taken as a tax-free lump sum.
You may not need the money just yet, in which case you might want to consider leaving your pension pot invested.
Any money left in a pension stays invested and has the potential to grow. This can mean that there’s more available when you choose to access it.
Do you need a regular income?
Depending on your other investments and assets, taking your pension as a lump sum may leave you with no regular income other than the State Pension.
Your money is subject to tax
You can take a 25% lump sum from your pension pot tax-free, the other 75% will be taxed as income. Taking all your money at once may mean you enter a higher rate tax bracket.
Carry on saving
Once you take your pension pot as cash or draw income from your flexi-access drawdown, you can still carry on funding pensions, but the maximum amount you can save each year will reduce to £4,000.
Those in capped drawdown on 5th April 2015 may continue in capped drawdown and benefit from the current £40,000 annual pension funding allowance.
The residual funds payable to your beneficiaries on death will also depend upon your retirement choices. We would strongly recommend that you seek advice from a suitably qualified financial planner before committing yourself.
The Government have announced changes to the way death benefits from pensions are taxed from April 2015:
There will normally be no inheritance tax to pay.
If you chose a guaranteed period and die within this period then the annuity will continue to be paid until the end of the guaranteed period.
If you bought a joint life annuity the annuity payments will continue to be paid to the second person, at the level you chose, until they die. The annuity payments will be taxed as income at their marginal rate.
In all other cases your money dies with you so no further payments are made.
Your basic State Pension is paid only to you and can’t be passed on to someone else when you die. If you have contributed towards an additional State Pension your spouse or civil partner may get some of this.
If your spouse or civil partner is over State Pension age when you die, they may be able to increase their basic State Pension by using your qualifying years entitlement. That is, as long as they don’t already get a full pension.
If your spouse or civil partner is under State Pension age when you die, any State Pension based on your qualifying years entitlement will be added to their State Pension when they claim it. For this to happen they can’t have remarried or formed a new civil partnership by the time they reach State Pension age.
If you’ve deferred your State Pension and you die, your spouse or civil partner may be able to claim an additional State Pension or a lump sum.
You will want to get the most from the new pension freedom, but at the same time you need to make sure you get through retirement comfortably without running out of money. You also need to think about the tax implications of your choices and you may not be able to change your mind.
Make sure you talk the options through with your financial advisor.
Disclaimers: The information given in this document is for information only and does not constitute investment, legal, accounting or tax advice, or representation that any investment or service is suitable or appropriate to your individual circumstances. You should seek professional advice before making any investment decision. The value of investments, and the income from them, can fall as well as rise. An investor may not get back the amount of money invested.
Past performance is not a guide to future performance. The facts and opinions expressed are those of the author of the document as of the date of writing and are liable to change without notice. We do not make any representation as to the accuracy or completeness of the material and do not accept liability for any loss arising from the use hereof. We are under no obligation to ensure that updates to the document are brought to the attention of any recipient of this material.
Oury Clark is authorised and regulated by the Financial Conduct Authority.
Copyright © 2013 - Oury Clark.