‘Freedom and choice’
New pension legislation announced in Budget 2014 introduced fundamental reforms to the way we can access our pension funds: it’s become popularly known as ‘pension freedom and choice’.
Despite the raft of changes introduced in the budget, the change that inevitably hit the headlines was the one that abolished the need for pension scheme members to have to buy an annuity or income drawdown product, giving them the freedom to take the contents of their pension pot in cash if they wanted to do so. But is that as good an idea as it sounds – what are the options?
Defined contribution pension scheme – your options
From April 2015, if you’re a member of a defined contribution pension scheme and are aged 55 or over, you have complete freedom over what you do with your pension pot. As you don’t now have to use it to buy an annuity you have a number of options.
- Leave it until your pension scheme matures
Although Budget 2014 legislation granted access to those aged 55 or over, if you’re still below the scheme’s agreed retirement age, potentially, the only way you’ll be able to access your pension pot will be by breaking your contract – expect to pay heavily for doing so. Leaving it until it matures means you won’t have to pay any penalties and it should continue to increase in value.
- Buy an annuity
Just because Budget 2014 legislation removes the need for you to buy an annuity, that doesn’t mean you shouldn’t as it will provide you with a regular, guaranteed income. But the new legislation also means that you don’t have to invest your entire pension pot, you may choose to use just part of it. Different types of annuity are available so it’s important to get advice and shop around.
- Draw money from your pension pot (income drawdown)
There are two alternatives. You can take up to 25% as a tax-free pension commencement lump sum (PCLS) upfront and then take the balance as either a regular income or withdraw it as you need it. Alternatively you can take smaller cash sums – known as uncrystallised funds pension lump sums (UFPLSs) – as and when you need them, the first 25% of each being tax free.
The amount that can be taken as a PCLS is capped at £268,275 – 25% of the current standard lifetime allowance of £1,073,100.
Note: in his Spring Statement of 15 March 2023, chancellor Jeremy Hunt announced that the lifetime allowance would be abolished from 6 April 2024.
- Cash in your pension pot
Cashing-in your pension pot does mean alternative income strategies may become possible but, before you do so, there are several things you need to give serious thought to. First of all: what are you going to live on when you retire? Secondly: tax – although you could take the first 25% as a tax-free PCLS, the remaining 75% will count as taxable income and that could be a big hit, especially if you’re still working.
- Mix your options
You don’t have to choose one option, you can use a combination, either before you retire, when you retire or after you’ve retired.
What hit the headlines and led to sensationalist media speculation was the possibility that people would cash in their entire pension pot, spend it ‘unwisely’ and then become a liability to the state.*
To force people to think about the implications the FCA advised all pension scheme providers that they must make scheme members aware of the risks associated with cashing in their pension.
If you do decide to go ahead and cash-in your pension pot it’s probable that you’ll have to complete a risk questionnaire and sign a declaration confirming that you’ve taken financial advice and understand the risks you face before the providers allow you to have the money. In addition, some pension schemes will have a contractually binding retirement age and, if you’re below that, they may decline your request. If you still want to take the money you may have to transfer the money into another scheme incurring administration costs and redemption fees throughout the process.
In fact, although suddenly being given access to a large amount of cash, the reality appears to be that most people are exercising restraint, getting advice and being ‘sensible’.
*The press widely reported a government minister’s comment about people using the money to ‘buy a Lamborghini’. Lamborghini seized the opportunity and fuelled the controversy by announcing a limited edition model, the Lamborghini Reventon APR-01, which would be available ‘exclusively to anyone buying it using the proceeds of a defined contribution pension scheme’!
What should you do?
Everyone’s circumstances are different so it’s impossible to give a ‘one-size-fits-all’ answer – except that the best thing you could possibly do is talk to a suitably qualified, independent financial adviser (IFA).
Pensions are as important as they are complicated and it’s really not a good idea to leave something so important to chance. A good IFA will be able to evaluate your circumstances and come up with a range of options that help you make the most of your savings.
It’s also important to ignore any tempting ‘investment opportunities’ that you either read about or suddenly appear in the post. The reforms opened up opportunities for savers to have more choice in what they do with their pension savings but, unfortunately, it also gave fraudsters more of an opportunity to get rich at your expense. Remember the two golden rules: ‘There’s no such thing as free lunch’ and ‘If it seems too good to be true, it probably is’.
How can One Financial Solutions help you?
One Financial Solutions is here to help you. We’ll work with you, assess your current circumstances, review your retirement goals and help you put in place a pension strategy to meet them, ensuring that having a ‘financially secure and comfortable retirement’ isn’t something that’s left to chance.
We’ll assess the value of your State Pension and make sure you receive everything you’re entitled to. We’ll review any workplace and private pensions you may have and recommend any changes we feel are beneficial. If you need a pension scheme we’ll find one for you and, as a truly independent firm of financial advisers, we’ll select one from the entire market and make sure it’s the best one for you.
So, if you’re looking for specific help about any aspect of your pension or just want advice on the subject, please call us on 020 3714 9565 or ask us to call you by sending an email to email@example.com.