5 things you need to know about the 2015 pension changes
The government pension changes: important decisions stand between you and a happy retirement.
This April saw a huge pension shake-up. The government pension changes allow anyone over 55 unrestricted access to their whole pension pot and remove the need to buy an annuity to provide guaranteed income for life.
It could be good news, but only if you get good advice and make the right choices. Some pension experts warn the pension changes bring big and serious risks like fraudsters stealing your savings, paying too much tax and even the possibility of treating your pension pot like a cash windfall - and blowing it too fast.
We’ve asked our partners at Wren Sterling to tell us five things about the pension changes you really ought to know.
1) What are the ‘pension changes 2015’?
The government calls the changes ‘Pension Freedoms’ and they affect 4.5 million people with Defined Contribution (DC) schemes. Put simply, if you’re aged 55 or over, you now have more choice about what to do with your pension pot when you retire.
Previously you had to take out an annuity that swapped your pension savings for a guaranteed regular income to last you the rest of your life. Under the pension changes however, you can now:
a) Take the whole of your pension pot in one go (although there are likely to be tax implications).
b) Take smaller lump sums, as and when you like.
c) Take up to 25% tax free and use the rest to take a regular income using drawdown or via an annuity
If you have a Defined Benefit pensions (which promises a particular annual income) you may also be able to take advantages of the pension changes if you swap it for a DC scheme.
2) Take the money? Or stick to a guaranteed income.
Of course, you don’t have to do anything; you can leave your pension where it is and continue to add to it, until you’re ready to retire and swap it all for a regular lifetime income just as before. (The 55% death tax on pension pots still invested has also been axed where the member dies under the age of 75.)
On the other hand former Lib Dem Pension’s Minister, Steve Webb, famously declared that people approaching retirement should be free to ‘blow’ their pension pot on a Lamborghini sports car if they wished. But before you take out a huge chunk of money - and either spend it or invest it all in one go - we recommend you first calculate the income you’d like to retire upon. The independent Money Advice Service has an online calculator to help you.
3) The pension changes: The risks.
Anyone who's been carefully saving for their retirement over the course of their working life is unlikely to see Steve Webb’s suggestion as a sensible option. Thankfully research from a leading pension provider suggests just 2% of people are considering blowing their pension pot on purchases.
But there are other risks to be aware of. One think tank has warned that people may not buy the right pension product that will serve them properly throughout their whole retirement. Others may be susceptible to fraudsters. A group of leading MPs have called for a new regulator specifically to oversee the new pensions market to protect pensioners.
4) Beware the pension changes tax trap.
The people at the tax office are also watching how you react to the changes to pension rules … You can take 25% of your pension pot as a tax-free lump sum or you can take out smaller amounts, of which the first 25% will be tax free on each occasion. But while 25% of the money you withdraw from your pension can be taken as a tax-free lump sum, the remainder will be treated as income and taxed accordingly. If you withdraw so much that it pushes you into a higher tax bracket for that financial year, then you could face a shock bill soon afterwards. For this tax year the 20% basic rate tax threshold is £10,600 a year, while the 40% threshold is £42,285 and the 45% threshold is £150,000. If your pension withdrawals, added to any other earnings you have, push you over any of these thresholds, then you’ll pay tax at a higher rate.
5) Get some independent pensions advice.
The government is offering guidance on the UK pension changes and retirement options through the Pension Wise scheme, though it won’t be tailored to specific needs or offer advice.
At The Nottingham, we have independent experts on hand to help you secure your financial future and build the best possible retirement for you and your family. With the help of our trusted partner Wren Sterling, we’re offering an unbiased retirement planning advice service in all our branches. Their experts can help explain the pension changes to you in more detail and give you completely independent advice on how to make them work in your favour. You’ll get the best options from the whole of the market (we’ve no ties to any one provider) and they can also shed light on other changes that also came into effect in April that you may be able to benefit from. There’s no charge for initial advice but there is a cost for subsequent advice. However, getting the right advice is money well spent and helps avoid making bad decisions which could prove costly. The benefits should outweigh costs.