Pension Fund

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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About the author: Tim Veiro