Pension Freedoms 4 years on

Pension Freedoms 4 years on

The Government’s announcement of Pension Freedoms in 2014 came into play from the start of the 2015/16 tax year, promising “freedom and choice in pensions”. It has now been four years since the new rulings took effect, yet many people approaching retirement age are still none the wiser as to the key features.

Let’s remind ourselves of the key elements, with a focus on what it means for your finances.

The Pension Freedoms Plan

The introduction of the new plans in 2015 allows people aged 55 and over to take out their private pensions as a single lump sum, removing the previous limit of 25%, although anything over the initial 25% will be hit by tax which could put you into a higher tax rate bracket..

Individuals essentially have a number of options at their disposal:

  1. Leave funds in the pension, as is the default position until you wish to start taking payments.
  1. Withdraw the full sum of money from the private pension, although not recommended in nearly all cases. (25% tax-free; 75% taxed).
  1. Withdraw lump sums equalling a percentage of the overall funds, leaving the leftovers in the pension fund.
  1. Take the tax-free 25% and then buy an annuity to gain a monthly income for the rest of your life.
  1. Take the tax-free 25% and then buy a drawdown product, giving you a monthly income and the flexibility to keep withdrawing lump sums if required.
  1. A combination of an annuity to secure guaranteed income alongside the flexibility of withdrawals

A recent market study by our regulator, The Financial Conduct Authority estimated that 100,000 people use the fifth option without seeking advice and is costing consumers up to £25m in missed pension income each year. Moreover, pension freedoms can lead to the unnecessary tax being paid and being caught up with other rules, such as the Money Purchase Annual Allowance which can limit your contributions to £4k a year, rather than the annual allowance currently £40k.

As such, it is highly advised that you speak to an expert before making any decisions on how to utilise your pension.

New Rulings From 2019

While the increased flexibility has provided additional options, the teething problems of missed pension income have been further exacerbated by the fact that many have focused on the short-term by taking lump sums, essentially putting their long-term financial stability in jeopardy.

As a result, the Financial Conduct Authority (FCA) is to usher in some amendments in November 2019. These planned changes are designed to make things a lot clearer for individuals.

Firstly, consumers will receive “wake up packs” every five years (starting at age 50) until their pension has been entirely cashed. This will include a summary, risk warning, and basic guidance. Secondly, pension firms will have to look into enhanced annuities to see whether clients are eligible. This must be supported by a market-leading quote based on their individual circumstances.

Further ideas are being trialed with a view to making them available in 2020. This includes a requirement for pension firms to provide clear information regarding payments and fees, as well as insight into potential investment pathways.

It is important to note that 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.

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.

Given the pending changes, now is the perfect time to seek further advice from a financial adviser. The health of your future finances may depend on it.

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The Pro’s and Con’s of buying an Annuity

The Pro’s and Con’s of buying an Annuity

Protecting your financial health with the right retirement plan is a responsibility that nobody can afford to ignore. The decisions revolving around your pension are undoubtedly among the most important of all, and an annuity is one of the options that you’ve probably heard about.

Before rushing into a decision one way or another, it’s imperative that you understand the potential benefits and drawbacks – not least because it is often not possible to undo your decision. Here’s all you need to know.

 Annuities At A Glance

In essence, an annuity is an agreement in which you trade your pension (or at least a part of it) for a guaranteed income that will last throughout retirement until the day you die, regardless of what age that happens.

Annuities are a form of insurance, then, and are used by many people throughout their retirement years.

 Annuities: The Pros & Cons

Like most financial products, there are a number of pros and cons to consider before taking out an annuity agreement. Let’s take a look at both below.

The Pros

First and foremost, the annuity arrangement means that your income is guaranteed for life. This means that you’ll have money entering your pocket even if you live for 20 or 30 years after the annuity payments start. This in itself is extremely reassuring.

Annuity agreements offer flexible options, including the choice between flat payments and increasing payments. The latter option gives you the best chance of staying ahead of inflation and increased living costs, resulting in the same level of buying power at all times, albeit starting at a lower initial income.

It is also possible to pay a lump sum and start taking monthly payments right away, or defer the payments until a later date (such as after you retire). Some of the agreements also allow you to defer payments to a loved one should you pass – albeit only or a set amount of time.

If you have health problems, you could receive a higher level of income. This is because of the provider will look at life expectancy

The Cons

Annuities can be quite complex and difficult to understand. Nobody should take a financial product that they do not understand.

Annuities do not allow you to change the payment terms, even if your situation changes, which can tie you into financially suffocating agreements.

Annuity providers offer different rates of payments, so it is important to shop around. Depending on investment performance and longevity, an Annuity may not offer the best deal when it comes to the total income it pays out. When you (or your spouse if joint income is selected) dies the annuity dies with you.

Is An Annuity Agreement Right For You?

As with most financial products, there is no single right or wrong answer. As long as you consider what’s most important to you, finding the right option shouldn’t be too difficult. But if you do still require some help, our experts are only a call away.

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