11 September 2018 | Comment | Article by Jason Lloyd

Taking advantage of pension freedoms

The poet and playwright Oscar Wilde once commented, "When I was young I thought that money was the most important thing in life; now that I am old I know that it is".

As of 6 April 2015, the Government introduced major changes to how individuals can unlock their defined contribution (DC) private pensions. Once you reach the age of 55 years, you now have much more freedom to access your pension savings – even if you’re still working.

Depending on the scheme, you may be able to take cash lump sums, a variable income through drawdown (known as ‘flexi-access drawdown’), a guaranteed income under an annuity or a combination of these options. This means being faced with the choice of deciding how much money to take out each year and setting an appropriate investment strategy. Pages 14 to 16 of our downloadable Guide to Retirement Planning highlights how you can take your pension using choose one or more options to suit your needs.

Be careful when accessing

Pension freedoms have given retirees considerable flexibility over how they draw an income or withdraw lump sums from their accumulated retirement savings. But concerns have been raised that some savers may risk running out of cash if they siphon too much out of their pension pots.

Around one in ten individuals planning to retire this year expect to withdraw their entire pension savings as one lump sum, risking a significant tax bill and an impact on their future retirement income. The findings[1] are part of unique annual research – now in its 11th year – into the financial plans and aspirations of people planning to retire in the year ahead and show that, in total, one in five retiring this year will risk avoidable tax bills by taking out more than the tax-free 25% limit on withdrawals.

Taking an appropriate income or money from your pension is very complex. We can help you assess your options.

Taking advantage of pension freedoms

Interestingly many are not necessarily spending all the cash – the main reason given by those taking their entire fund in one go was to invest in other areas such as property, a savings account or an investment fund.

Since the launch of pension freedom reforms in April 2015, more than 1.1 million people aged 55-plus have withdrawn around £15,744 billion [2] in flexible payments.

The UK Government estimates[3] show that around £2.6 billion was paid in tax by people taking advantage of pension freedoms in the 2015/16 and 2016/17 tax years, with another £1.1 billion raised in the 2017/18 tax year.

The most popular use of the cash is for holidays, with 34% planning to spend the money on trips. Around (25%) will spend the money on home improvements, while one in five (20%) will gift the money to their children or grandchildren. Other popular uses include buying cars or paying off mortgages.

What you need to ask yourself before cashing in your pension pot

Q: Have you considered what the tax implications are?

At the heart of any pension transaction you undertake, tax planning is a major consideration. Only the first 25% of the amount that you drawdown from your pension pot is tax-free, and the remaining 75% is taxed as earned income.

Q: Will your money last the duration of your retirement years?

Before taking the cash, it is crucial to think about whether you will have enough money to last the duration of your retirement. It’s not a one-off decision: you should regularly review your choices throughout your retirement, as your needs evolve and income needs may change.

Q: Will your pension scheme allow you to cash in your pension pot?

If you’re convinced that cashing in your pension pot is the right move for you, you need to ensure that your pension scheme allows you to do so. If not, it means that you’ll need to transfer your savings into a suitable pension scheme to be able to access your cash.

Q: Have you sought professional financial advice about your plans?

Not seeking professional financial advice can be very risky, especially when it comes to deciding how eventually to take your pension. If you get it wrong, it could be very costly and have a considerable impact on your retirement lifestyle and standard of living. We’ll make sure that the action you take is the right one for you, your family and your needs.

To review your situation and consider the ways we can to help you make the most of your retirement income, contact our Independent Financial Advisers on 029 2066 0565.

Source data:

[1] Research Plus conducted an independent online survey for Prudential between 29 November and 11 December 2017 among 9,896 non-retired UK adults aged 45+, including 1,000 planning to retire in 2018.

[2] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/675350/Pensions_Flexibility_Jan_ 2018.pdf

[3] http://obr.uk/overview-of-the-november-2017-economic-and-fiscal-outlook/

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