Retirement Options – Planning For Tomorrow

£19m released each day since pension freedoms launch

In his 2015 Spring Budget, then-chancellor George Osborne introduced sweeping changes to the way that pensions are taxed. The new pension freedom rules have led to the over-55s being faced with a variety of different choices when taking and investing their nest eggs.

Prior to April 2015, when most people with a defined contribution pension reached retirement age, the only option available was to buy an annuity, which involved using pension savings to purchase a guaranteed income for life.

People retiring each year

Roll on five years, it now means anyone aged 55 and over can take the entire amount of their defined contribution pension scheme as a lump sum, paying no tax on the first 25%, with the remaining taxed as if it were a salary at their Income Tax rate.

Before this, tax restrictions ensured that many of the people retiring each year were required to purchase an annuity – a product provided by insurers which turns a pension pot into a secure retirement income for life. The problem with some annuities is that they have become poor value, particularly for savers who bought the wrong kind.

Peak pension freedoms

Official figures[1] published show that £32.97 billion of taxable payments have been taken from pensions since freedom and choice were introduced. This equates to an average of £18.75 million being flexibly withdrawn every day over the past 1,760 days since pension freedoms were introduced.

In the coming decade, a record nine million people are set to enter the arena of the pension freedoms at age 55[2]. This is more than is expected to be seen in any decade that follows, with the 2020s likely to see peak pension freedoms.

Increased responsibility

With the popularity of pension freedoms continuing to grow and savers being entrusted with increased individual responsibility, it is worrying that 94% of adults are flying solo, not seeking any financial advice each year.[3]

The Money and Pensions Service (MaPS) has launched its strategy with a vision of ‘everyone making the most of their money and pensions’[4].

Take your time and seek advice

If you are considering your pension freedom options, the future has ‘got a lot more interesting’. Remember: take your time and seek professional financial advice. The pension freedoms are available from age 55, but there is no need to act at age 55. And your time in retirement may be longer than ever before.

Pension freedom options

There are a number of different options when you are deciding how to take your defined contribution pension pot.

Leave your whole pot untouched

You don’t have to start taking money from your pension pot when you reach your ‘selected retirement age’. You can leave your money invested in your pot until you need it.

Guaranteed income (annuity)

You use your pot to purchase an insurance policy that guarantees you an income for the rest of your life – no matter how long you live.

Adjustable income

Your pot is invested to give you a regular income. You decide how much to take out and when, and how long you want it to last.

Take cash lump sums

You can take smaller sums of money from your pot until you run out. Your 25% tax-free amount isn’t paid in one lump sum – you get it over time.

Take your entire pot in one go

You can cash in your entire pot – 25% is tax-free, the rest is taxable.

Combine your options

You can also combine different options. However, to do this, you would usually need a bigger pot.

Be aware of the scammers

Make sure you don’t fall victim to scammers. Your pension is likely to represent the biggest single source of your private wealth, so the attraction for scammers is obvious. Since January 2019, it has been illegal to make these cold calls. See the Financial Conduct Authority’s ScamSmart website for more advice.

Don’t overlook the tax

Think about the matter of tax. How will this impact your particular situation? The way in which you access your pension savings can have significant implications on how much tax you may need to pay and on the income in your retirement.

Professional financial advice

Finally, don’t forget the importance of obtaining professional financial advice. You may have been saving for 30 years, so take more than 30 minutes when considering your options. Let us provide you with the professional advice to ensure that you end up with the best options for your particular situation.

Source data:
[1] Gov.UK – Flexible Payments From Pensions
[2] Gov.UK – 2018 Annual Population Estimates
[3] FCA – The Financial Lives Of Consumers Across the UK
[4] Money and Pension Service – UK Strategy for Financial Wellbeing

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
Tax rules are complicated, so you should always obtain professional advice.
A pension is a long-term investment.
The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
Pensions are not normally accessible until age 55. Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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