Since pensions freedom went live on 6th April this year, writes Mark Soper, there has been a huge amount of “noise’’ around pensions – as well as a potentially tax-laden emergency Budget.
So where does all that leave the nation’s army of retirees as well as those approaching retirement?
The short answer is: no one in the pensions sector is quite sure. There are still a number of quite critical changes that the Government are still consulting on.
But that answer doesn’t help anyone needing to make decisions now – even if the decision is to sit on one’s hands – let alone starting to plan ahead. So here’s a longer answer, as I thought it might be a good idea to jot down my pensions freedom top tips based on those now infamous phrase “the known knowns, the known unknowns and the unknown unknowns”.
So here are my first three tips – you’ll find the second three in this accompanying article (https://www.retireeasy.co.uk/news/article/marks-top-tips-for-pensions-freedom-numbers-four-to-six).
Top Tip 1 – Don’t forget about tax
I think most of us will all know now that any amount of your pension fund that is drawn down above 25% as a lump sum is potentially taxable. BUT, even if you are a nil tax payer or not due to pay tax on all of your drawdown – the amount drawn down will be taxed immediately using HMRC’s emergency tax rules by as much as 45%.
The problem is that the provider must make the payment using the PAYE tax system and this is not fully compatible with lump sum payments.
It’s too complex to explain the computations here but if you think you should not be paying tax or have paid too much tax on your drawdown, you can wait until the end of the tax year for HMRC to reconcile your tax or you can reclaim it now.
There are three different claim forms depending on your exact circumstances: P50Z, P53Z 0or P55 and for more info go to https://www.gov.uk/claim-tax-refund/you-get-a-pension.
Top Tip 2 – Don’t forget about pension provider rules and watch the costs
The concept of pensions freedom was the brainchild of the previous coalition government, particularly Steve Webb, with virtually no consultation whatsoever with the pension providers.
So launching it in the timeframe of just one year from announcement caught everyone – in cricketing terms – on the back foot. Not least the pension providers themselves, an industry used to making changes carefully and slowly.
In a nutshell, most of the pension providers’ systems cannot yet cope with releasing ad hoc payments from your pension funds. Indeed, they can actually refuse to hand over your funds: pension freedoms is not a statutory right.
If you are faced with a refusal and are keen to make use of your money (on which, more later) you will need to seek a new pension provider and new pension plan to facilitate your payment. This, however, may come at a cost (which may be considerable) and it may also be difficult to obtain affordable advice.
And the advice you get may well not be what you want to hear anyway. And you will find many advisers not even prepared to offer advice – if that doesn’t sound like a contradiction in terms.
In essence, the Regulator is at odds with Government, and takes the view that – in most cases – encashment of a pension fund is unlikely to represent suitable advice. Indeed, advisers are under considerable scrutiny from the regulator on how they deal with and advise on customer requests to drawdown so you may find many advisers reluctant to advise in this area.
In such instances you will need to approach your pension provider direct but here lies the problem: they may refuse to deal with you until you have sought advice – putting you in a Kafka-like circle.
Top Tip 3 – Don’t dismiss annuities and rush into drawdown
The chances are that when you started your pension plan you intended to keep it running until you stopped work… with plans to take some or all of the tax-free lump sum available and buy an annuity plan with the rest.
That, after all, was the way the vast majority of retirees funded their retirement.
Of course, annuities haven’t looked like such a lucrative option for some time now because annuity rates (i.e. the amount of pension you receive in return for your pension fund) have fallen significantly over the last decade. This has been one of the reasons that the concept of pensions freedom has been welcomed in many quarters.
Certainly since the announcement, sales of annuities have plummeted.
However, an Annuity Plan remains the only vehicle that will provide you with a guaranteed income for the remainder of your lifetime – and possibly that of a family member after your death. So before you take any drawdown make sure you get an annuity quotation first to check the guaranteed income that you will be giving up.
Make sure you tell the annuity provider or adviser about your lifestyle and health status to ensure you get the best possible annuity rates. You’ll find a longer article on annuities in our helpful guides section: https://www.retireeasy.co.uk/news/article/annuities-a-basic-guide
Once you know the amount of the annuity and the guarantee you are giving up you will be more informed to know whether a Drawdown plan may be the better route for you. And don’t forget you may do both and use part of your pension fund to buy an Annuity Plan say to pay the fixed costs e.g. Utility bills and Council Tax and use the balance of your fund to provide a Drawdown Plan where the income generated will be unguaranteed.
With me so far? Now click here for the next three of my top six tips! https://www.retireeasy.co.uk/news/article/marks-top-tips-for-pensions-freedom-numbers-four-to-six