Pension Freedoms' Checklist
Posted by jdavis on April 6, 2015
No longer do you have to buy an annuity.
No longer can you only have a regular income from your pension. From age 55, you can take lump sums, regularly or irregularly, to meet your needs. On money purchase pensions (investment pot pensions) you will be able to take up to 25% as a tax free cash lump sum - in one go or in a few stages - and then draw (taxable) income as you want it.
After you have taken some tax free cash the rest will be paid to your beneficiaries should you die early. The 'income' pot will be taxed at 45% this year and at your recipient's marginal income tax rate from 6 April 2015. Thus, whether you live long or die early your family receives your pension.
What will you do?
Leave it to build tax free?
Take some tax free cash?
Take a large chunk and pay tax? Pay down debts?
Ask us for advice.
The New Pension Freedoms Checklist:
Four Things You Must Do Before Making Any Decision About Your Savings
The new pension freedoms are great news for savers, with more flexibility and options for retirement now available. However, the freedoms also come with a level of risk, particularly for that first wave of savers looking to exercise their new rights in the next twelve months or so.
1. Make sure you factor in, but don’t overestimate, your state pension
It is important to remember that, alongside your private pension savings, you will also probably benefit from a state pension in your retirement. Where once it might have been tempting to rely on the state pension, now it is more readily expected that your personal savings will be your main source of income in retirement and the state pension a nice ‘bonus’.
With this as your model, it’s important to remember the income the state pension will give you when planning for your retirement. It is at least equally important not to overestimate the contribution the state will make to your retirement. Factor a realistic figure into your plans, alongside the income your personal pension will generate.
2. Don’t underestimate your lifespan
It is very common for retirees to underestimate their own lifespan and, by extension, the amount of money they will need throughout their entire retirement. Whilst it is, of course, a difficult factor on which to put any sort of prediction, it is vital that you plan for a long and happy retirement, rather than risk trying to ‘get away’ with having less capital available to you. When planning your retirement income, make sure you’re planning for the long term!
3. Consider tax carefully
If you are looking at the new pension freedoms with some eagerness then don’t forget: whilst the taxation implications have been reduced, they have not been eradicated entirely.
After the first 25% tax free lump sum, withdrawals from your pension will be charged at your normal rate of income tax. If you are still earning an income, or if you make sizeable withdrawals in a tax year, then this could mean you enter the 40% or even 45% tax bracket.
Of course, if what you are planning for your pension income requires this level of withdrawal, then it may well be worth that level of taxation. Take care and make sure you have planned for, and are aware of, the taxation implications that your actions will create.
4. Work out what you want to do with your money, rather than just trying to get the highest amount
Perhaps the most important point of all! Whilst money is important to each of us, ultimately it is merely an enabler. There is no better aid to a happy retirement than clearly planning how you want to spend your money: the things you want to buy, the experiences you want to have, the family you want to help.
Once you have planned what you want to do with your retirement, money decisions become much easier. Will accessing your pension through the new pension freedom arrangements help you get to where you want to go in your retirement? More so than any monetary factors, this is arguably the most important question for retirees to attempt to answer.
Some will want to buy property. As we say above a) they'll be replacing tax free with heavily taxed b) they will be replacing a (we would hope) well thought out investment portfolio for a non-diversified asset. You'd better be very sure of your expected success.
Others will want (need) to pay off debts. If anything this probably is superior to the objective above. Yet... If your mortgage interest rate is, say, 2.5% are you SURE your pension won't make more than this and you pay off the debt gradually, without taxation on wwithdrawal? Also, of course, with tax, you'll have to withdraw more than your debt to repay it.