Access the power of your pension: How the 2015 reforms has put you in charge of your savings
The new tax year has ushered in a quiet revolution in how people use their pensions. Savers now have more freedom than ever before in how to use the money they have put in their pension.It’s a welcome shake up – while pension plans offered a range of generous tax reliefs, they have always been rather inflexible and often left savers with their hands tied behind their back. Savers now have the choice to reach in to the pension pot and use their money themselves or pass money on to their families.
Pliable pensions: The new possibilities
While the reforms provide potential solutions, with opportunity comes risk – you need to understand the pros and cons of the new rules before you can decide how best to take advantage of them.
This starts with your options about how to use your pension pot. Now, everybody over the age of 55 has the option of using income drawdown to access their pension pots directly – there are no limits on how much you take (you can even take the whole lot in one go) and the remaining savings can be left invested.
It will also be possible to take 25% of the pot as a tax-free cash lump sum, but withdrawals above this amount will be taxable at your marginal rate of income tax.
Fit your finances to your needs
The 2015 pension reform also gives savers all sorts of extra options for how to access their pensions. For example, you can continue to invest your savings as you see fit, drawing the income you need today while leaving the rest to generate returns that will pay for future income needs. Alternatively, you can take your pension savings out and invest into other assets.
Many savers are considering buy- to-let property investment, for example. Plus you can arrange your finances to fit your individual needs. It will be possible to take your tax-free lump sum as a series of payments, rather than a one-off, for example.
However, there will be risks to consider too. While annuities have been unpopular with many savers, the promise of lifetime income at least means you do not have to worry about running out of money. Professional pensions advice will be essential.
Check the small print
If you are managing your income yourself, particularly if you are making large withdrawals from your pension savings as soon as you can, it is possible that you will exhaust your savings, leaving you with only State Benefits to rely on for the rest of your retirement.
Also, tax charges may really bite on large withdrawals. If you take a sizeable sum out of your pension savings, it may tip you into a higher tax band than normal – some savers will end up paying higher-rate tax for the first time in their lives, or even find themselves in the 45 per cent tax band and losing their personal income tax allowance.
These issues should not necessarily put you off – but those who don’t think about how to mitigate the risks could be caught out. Equally, with the reforms comes a fair amount of small print – taking one pension option may close off another avenue, so decisions need to be made in a carefully considered manner.
Passing your pension pot on tax-free
The changes also bring new rules on passing on pension savings following your death. The basic principle is that from now on it is your age which is the most important issue to consider when passing on pension savings to loved ones.
If you pass away before reaching the age of 75, all pension savings can be left to a beneficiary of your choice free of tax, with the money passing to them as a pension pot they can subsequently use for themselves, drawing a lump sum or an income – dependents’ annuities will also be tax-free.
After age 75, you will still be able to pass on your savings in the same way, but your chosen beneficiary will pay income tax on the money at their marginal rate of income tax. The same rule will apply to dependents’ annuities.
It is even possible to pass money down through several generations under the new system, with beneficiaries entitled to pass unused savings still held in the pensions pot on to their own families.
Pension advice more important now than ever
In practice, to make the best of these opportunities, the vast majority of people will need to take independent financial advice – both on the implications of the pension reforms and on retirement planning in the context of your broader financial planning. There are potential benefits for most savers from these reforms but it will still be important to balance risk and reward carefully, and there will not be one-size-fits-all solutions. Getting the right advice will pay.
For more insights and pensions advice that is practical and effective contact HW Fisher & Company’s pension group. HW Fisher acts for a range of corporate and private clients, ranging from high net worth individuals and small owner-managed businesses to national unions and membership organisations.