New rules came into force in April 2015 which introduced ways of taking pension benefits, without restriction for those aged 55 or older, and for those invested in "defined contribution" schemes (essentially where you have a pot of money invested). They do not apply to final salary schemes.
These freedoms have generally been welcomed, and in our view, changes the basis of the risk. With an annuity you run the risk of not surviving long enough to get your money back. With these changes you run the risk of living too long (or, spending the money too quickly) and running out of money for your retirement!
The main aspects of these changes are:
- The ability to take the entire pension fund in one go
- The ability to take the tax-free cash and then unlimited withdrawals from the remaining fund
- The ability to take small chunks of the pension
- More tax efficient death benefits
- Restrictions on future contributions in some circumstances
If you have a defined contribution pension, such as a personal pension, you might find that your existing provider will not allow you to take advantage of the new rules, and you have to transfer to a new provider, which we can help with.
You now have complete control as to how quickly or slowly you spend the money. If you withdraw from your pension, and spend it too quickly, you risk running out of money. Pensions no longer have to be used to provide a sustainable income.
In our view, we expect the greatest appeal will be for flexi-access drawdown, which allows access to tax-free cash and then unlimited withdrawals from the rest of the money, as we believe most people generally want access to their entire tax-free cash. The other option will be uncrystallised fund pension lump sum (UFPLS) which we feel will be suitable for people wanting smaller portions of the tax-free cash.
However, both flexi-access drawdown and uncrystallised fund pension lump sum can both be used to take all the fund in one go. So, it remains to be seen which product will be used to do this.
The disadvantages of the new flexibilities are:
- You may deplete the fund, and run out of money
- Withdrawals could incur high levels of income tax
- Income tax could amount to an effective rate of up to 60%
- Withdrawals could affect the ability to claim benefits
- It could restrict future contributions to other pensions
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just want to chat through some details about your pension then please feel free to contact us, without obligation. Either contact us online or call 0800 011 2713.