George Osborne’s 2014 Budget statement paved the way for a range of changes to pensions that have altered the retirement income market forever. Unsurprisingly, annuities were dealt a hefty blow, but it’s clear that the certainty they offer means that they continue to have an important role to play as part of retirement planning.
It is often said that there are only two true certainties in life, death and taxes. Although this may be true, few of us can escape a third – bills. We all have to cover necessities such as accommodation, food, clothing, and utilities, and most people want to know that these will be taken care of, no matter what. Annuities are able to meet this need by offering a secure, guaranteed level of income.
The great news is that from 6th April 2015 the range of pension options available have widened considerably, giving people added flexibility and greater choice and control over their retirement income. As a result, more people are expected make use of a ‘blend’ of different retirement solutions to give them the combination of security and flexibility to meet their chosen lifestyle. Typically, this could mean buying an annuity with part of their fund to cover the essentials, and using the rest of the fund to provide a more flexible income.
Inevitably your circumstances will change, sometimes when you least expect it, so the more flexible you are the better. As a rule of thumb, it’s a good idea to keep as much as you can invested for growth, as you may live for a very long time in retirement and you want to make sure your savings are, at a minimum, keeping pace with inflation. Of course, one potential downside to bear in mind is that your investment will continue to be exposed to market conditions and may go down in value.
Most of the pension changes announced by George Osborne came into law on 6 April 2015. Here’s a reminder of the key points and a summary of what they could mean for you:
Freedom to take your pension fund as cash – If you are age 55 or over, you can choose to take your pension fund as one cash lump sum or a series of smaller cash lump sums. This was probably the headline item that attracted most of the press attention. However, apart from the obvious danger of spending it all and having nothing to fund your retirement, there are several crucial points to be aware of. In particular, although you will receive the first 25% of your fund tax free, the remainder will be taxed at your marginal rate of income tax. This could mean giving up almost half of it to the tax man!
Taking a flexible income when you need it – Although the ability to ‘draw down’ from a pension fund has been available for several years, there were rules which limited the amount you could take out. From 6th April this is now far more flexible and you can effectively withdraw as much as you like, when you like.
Transferring wealth on death – abolishment of the 55% death tax – The new pension rules also help you to pass on more of your pension wealth to your dependants when you die. Before the 6th April there was a 55% tax charge for any lump sums paid out of a drawdown fund, but now, if you die before you are 75, your beneficiaries can take a lump sum or income from the pension fund without paying tax. If you die after you are 75, your beneficiaries will pay just 45% tax on a lump sum withdrawal, or their marginal rate of tax if they choose to take an income from the fund.
Free guidance for everyone – Everyone now has access to free financial guidance provided by a Government approved agency. See www.pensionwise.gov.uk for more information. Although very helpful, it’s important to remember that this is guidance, not advice. You will still have to make sense of the rules and options before making your own decisions.
This is based on our current understanding of HMRC rules and legislation which is subject to change.
It takes time and know-how to fully explore and understand your options, and find the precise balance that’s going to meet your individual retirement needs. These are important decisions that could significantly affect your lifestyle and it makes absolute sense to get some professional advice.
A suitably qualified and regulated professional adviser will talk you through your current financial arrangements, your hopes and aspirations for retirement. You can expect them to help you understand the options open to you and to recommend the solution that is most likely to make your retirement goals a reality. Get in touch for some professional advice.