Approaching retirement age?
Welcome to the world of pension freedoms. Since 2015, savers have been given greater choice in terms of what they can do with their pension pot – which is fantastic. But, with greater choice comes greater complexity. And, like most people, you’re bound to be feeling a little confused.
The first thing to realise is that help is available if you need it.
A government advice service – called Pension Wise – is in place, designed to support savers who are suddenly faced with such difficult decisions. This service is free to those aged 50 and over. Impartial guidance can be offered online, over the phone or face-to-face. And if you’re struggling to get to grips with pension freedom rules and options, this is by far the best place to seek clarification.
In the meantime, here we offer a quick step-by-step ‘pension freedom guide’ to get you started.
6 steps to navigate your pension freedom options
Step 1 – Establish what type of pension scheme(s) you have
Different pension freedom rules apply to different types of pension. So, start by listing all of the plans you have accumulated throughout your career and establish exactly what type they are.
Defined benefit (DB) pension schemes are pretty limited in terms of the options they provide. You can access the first 25% tax-free and will receive a guaranteed yearly income. But that’s about it. It’s possible to request a DB pension transfer. Although these are very rarely advisable and, before making such a drastic move, you will be obligated to seek independent financial advice.
Defined contribution (DC) pension schemes, on the other hand, come with a diverse range of options. These schemes are the main focus of the pension freedom act and allow you much greater control.
Step 2 – Determine when you’d like to access your pension
Just because you can access your pension, doesn’t mean you have to.
Keep in mind, the main purpose of pension savings is to provide you with a reliable source of income during retirement. If taking money from the pot at 55 will leave you short later in life, is it really the best idea? It’s important to think carefully about what income you will need, to live a good quality of life in your golden years. Put together a budget and determine the best time, for you personally, to stop work and access your pension.
Step 3 – Get to grips with pension options
If you have a DC pension plan, there are several options available to you. You can:
- leave the pot untouched and access it at a later date
- purchase an annuity (i.e. a guaranteed income for life)
- take income flexibly (also known as flexi-access drawdown)
- take cash in chunks, with the first 25% tax-free
- cash in the entire pot
- combine a variety of the above options to suit your needs
Detailed information on these can be found in our previous blog – ‘Pension options – what can I do with my pot?’. And as previously mentioned, Pension Wise is always on-hand to help you make sense of the options available. To make an informed decision, you must be 100% clear about what each option entails and if it’s something that your current plan can offer.
Step 4 – Know the tax implications of your choices
We are not tax specialists and would always advise you to take advice from a qualified professional, but we do know that the first 25% taken from your pension pot is tax-free. After that, you will be taxed at your normal rate for any further withdrawals. And if you’re taking income from various sources (e.g. your pension, benefits etc.), there’s a chance you could be pushed into the higher tax bracket.
These tax rules could have a big impact on the right pension option for you. So be sure to keep them in mind when making your decision and work out exactly how much your savings will be affected and take professional advice if you can.
Step 5 – Consider your investments
The next step is to think about how your savings are invested.
Where are they invested right now? Are you happy with the level of risk that you’re taking? If not, what would be a better alternative for you? Do you have any other forms of income to rely on?
Again, it’s important to consider your desired retirement lifestyle. You need to be sure that how your money is invested aligns with what you want to do in the future. And to avoid any financial difficulties, establish a level of risk that is appropriate for you and your circumstances.
Step 6 – Think about what will happen when you die
Although you may not want to think so far ahead, you need to consider what will happen to your savings when you die – and whether you’d like to leave some money behind for your dependants.
Whilst DB pension schemes typically offer a regular income for dependants after you’re gone, any money left in a DC scheme will be paid in full to your beneficiaries. If you die before the age of 75, this payment is tax-free. If you die after 75, the funds are taxed at the beneficiaries’ normal rate.
This distinction could influence both which pension route you take and how much money you choose to drawdown. And the choice often comes down to family circumstances and preference.
Navigate pension freedoms with caution
Choosing what to do with your pension savings is a huge, complex decision – especially now there are so many options available to you. Which is why, you must do your research thoroughly, seek the advice that you’re entitled to and think carefully about how you’d like to proceed. These decisions can be impossible to undo and will have a significant impact on your financial future.
Unfortunately, due to the confusion surrounding pension freedom – over the last five years – lots of people have fallen victim to pension mis-selling and pension freedom scams. And if this applies to you, you could be entitled to compensation. Claims can be made in numerous ways.
For example, you can do it for free via the Financial Ombudsman, the Pensions Ombudsman, or the Financial Services Compensation Scheme (FSCS). Claims can also be made directly to the person to whom your claim relates or, if you have it, via your personal insurance for mis-selling.
Another option is to contact a claims management company, such as Money and Me Claims.
We have unparalleled knowledge of the pension freedom rules and have worked on countless ‘mis-advised pension freedom’ cases in the past with great success. By applying our knowledge and experience, we can both offer guidance on your eligibility to claim and take care of the entire claims process on your behalf.