April 2015 will herald the biggest shake up for a generation on how pension income can be taken. To ensure you are in the best possible shape for the new rules it is important to give your pensions a health check too.
There’s a common misconception amongst the general public that, come the 6th April, one can simply access the new ‘freedom & choice’ with their pension. Many may be disappointed.
There’s no obligation for every pension scheme, or contract, to offer the new freedoms. And many won’t support the full flexibility the new law allows. This means you may have to transfer an older existing scheme to a modern, flexible DC pension to benefit from the new flexibility.
You may have been saving towards retirement for many years across a variety of pension contracts. These will have been designed with a very different retirement journey in mind compared to the new flexible world, largely based around buying an annuity to provide a predictable lifetime income.
The default annuity purchase option is now a thing of the past and rightly you should demand greater choice and freedom over how you may use your pension fund to provide benefits in retirement – and create a legacy for your loved ones when you’re gone. But you may have to trade-up to get it.
The new rules provide a range of options on how income can be taken, in addition to the conventional lifetime annuity option, other options are:
- Full flexi-access drawdown: take all tax free cash and designate the remaining (crystallised) funds as a drawdown ‘income’ pot for flexible unlimited access.
- Phased flexi-access drawdown: take some tax free cash, designate the attaching (crystallised) ‘income’ pot for flexible unlimited access and leave the remaining (uncrystallised) funds as a ‘savings’ pot.
- Full withdrawal – no drawdown (UFPLS): take the entire pot in one go – with 25% tax free and the remainder taxable.
- Phased withdrawal – no drawdown (UFPLS): take some of the pot in one go, with 25% of what you take tax free and the remainder of the phased withdrawal amount taxable, leaving the remaining funds uncrystallised.
These options can, of course, be mixed and matched. For example, an annuity purchased to provide a baseline income to pay the bills – with the balance in flexi-access drawdown for tax-efficient income planning and flexible, tax-efficient death benefit options.
The key is tailoring an income solution that matches your needs and expectations.
Be aware of
Many older schemes do not offer a drawdown option. The UFPLS option was introduced as a way to allow members of these schemes access, at least in part, to some of the new flexibility.
However, some providers will not even be offering this. And even if UFPLS is the only available flexible income option, it means that it’s not possible to take some or all of your tax free cash and defer taking an income – so UFPLS triggers the drop to a £10k annual allowance with no carry forward.
For full tax planning flexibility, and to keep options open, the answer is drawdown.
Pain free retirement income
There’s more to a healthy pension than having all the income options at your disposal. In a world where pensions become as accessible as bank accounts it will be equally important that getting your hands on your money, should you wish to and when you want it, is simple and pain free.
Having income which is paid timely with the appropriate tax deductions and necessary reporting to make your tax affairs as uncomplicated as possible will reduce the administrative burden for you.
A huge benefit to you will be when you begin to take income will be the ability to monitor and track performance and sustainability. With many often acquiring a number of different pensions throughout our working lives, having a single view of your total pension holdings will make this job much easier.
This is easier if all the pensions are held in one place. And this could bring other benefits too – economies of scale, wider investment choice and better wealth transfer options.
However, before recommending a consolidation exercise, any costs of transfer must be considered. In particular, watching out for guarantees under older plans that could be lost. But we shouldn’t let the tail wag the dog and weighing-up the value of any guarantee against the benefits of consolidating would be part of the advice process.
Time for a check up
It’s easy to think that we all have time on our side to get our pensions 2015 ready. You may not need to access the new income flexibility for several years. But what if you die before taking their benefits? Funds could be trapped in in out-dated contract where the only options may be a lump sum or a dependant’s annuity. And your family could be missing out the ability to have an inherited drawdown pot from which they can access at any time.
It’s time for a pension health check. Make sure your pensions are fit for the new rules.
Optimum are here to help.