Why Pension Freedoms mean more needs for advice
When the changes to pensions came into force in April 2015 the headline writers talked about people now being able to access their pensions to buy Lamborghinis. In reality more than 1.5 million people have drawn from their pension since the changes. The latest figures from the Her Majesty’s Revenue and Customs stated that the average withdrawn was only £6,000. This may be because more and more people are starting to realise that pensions are a safe place to save money and funds should only be accessed if you really need them. With interest rates remaining at historic lows and remain unlikely to change substantially for some time taking your money out to leave in a bank account for a rainy day is not an attractive alternative.
Since Pensions freedoms it has made the decision to leave your pension invested even more attractive. There are now more things to consider before accessing your pension which has made getting advice even more important. It has been almost 30 years since you have been able to take a straight 25% of your personal pension as a lump sum without paying tax on this sum and this continues to be a popular and a worthwhile decision for many. As part of the Pensions Freedom legislation it included a reduced annual allowance in respect of money purchase pension contributions, known as the money purchase annual allowance (MPAA). One of the ways to trigger the MPAA is to take any amount from a personal pension outside of the tax free lump sum (except for Small Pots which are pensions below £10,000). With the MPAA retrospectively being reduced to £4,000 for this tax year (2017/18) it is very easy for someone to breach the allowance and have a tax charge of their marginal rate of tax.
Another reason why you should take advice is the fact that if you were to take all of your pension out in one go you would pay punitive levels of tax. If you were to spread the accessing of your pension over many years you could end up paying no tax at all. This is why for many that a combination of different savings products for retirement is often best.
If we take the example of Roger Bradley he has accumulated £450,000 into his pension fund. He has just turned 60 and has been offered the opportunity to semi-retire by his current employers and reduce his working hours to one day a week reducing his salary to just £12,000 net a year. Roger needs £25,000 net income a year to meet his outgoings and have a some money left over for holidays etc. We would recommend that he takes the relevant lump sum that he needs to each year to allow him to get the £13,000 in tax free cash until his state retirement age. This would mean £52,000 of his pension pot would need to be accessed to get a tax free lump sum of £13,000 (25% of £52,000) each time. This process would allow Roger to access his pension for many years without actually paying any tax on his pension income.
One of the other major reasons not to take monies out of your pension is the fact that it remains outside of your estate for inheritance tax purposes. Which means for many their pension should be low down on the list of places to generate income in retirement if one of your priorities is to pass on as much as possible to your beneficiaries.
What pension freedoms have given is more choice, with greater choice means more opportunities to make the decision that is not the best for your situation. With the different ways that different products are taxed it means that the product that is right for a 55 year old to take income is not necessarily the right product for a 65 year old and this is where the benefit of advice comes in.
For any further financial planning recommendations please feel free to visit www.bradburyhamilton.co.uk or call Sheriar Bradbury on 020 7220 7274.