The changes that took place in April 2015 relating to Pension Freedoms represented a complete shakeup of the UK’s pensions system, giving people much more control over their pension savings than before. Now more than two years later independent research from the Prudential highlights that two out of three over 55’s say that they are still confused by the reforms.
The Pension Reforms drastically increased the amount of freedom and choice available for pension savers. Individuals can now choose how and when they access their pension pot, and can tailor their approach to their personal circumstances.
Typical choices that face people approaching retirement include the option of drawing an annuity with all or part of the pension fund. Whilst annuities can offer a predictable income stream, currently the rates on offer are extremely low and do not necessarily offer good value. Even specialist enhanced annuities which take account of health conditions may still prove disappointing.
Flexi-access drawdown can offer the option of taking up to 25% of your pension pot tax-free, whist reinvesting the balance can enable the generation of a regular, taxable income. However, the income is not guaranteed and care needs to be taken with the investment strategy to ensure that the income remains sustainable.
The option will also be available to take the entire pension pot as cash in a single withdrawal with 25% of each withdrawal being tax free and the remaining 75% being liable to tax at an individual’s marginal rate of tax. Adopting this option could lead to a substantial tax liability if care is not taken.
Finally it would be possible to phase in benefits with both tax free cash and income being drawn over a period of time but again care needs to be taken with this approach to manage the investment strategy and the tax implications.
Indeed Government figures demonstrate the cost of this confusion for retirement savers as tax bills relating to the pension freedoms are now greater than anticipated. It was originally estimated that the changes would mean a total of £900 million be paid in both tax years 2015/16 and 2016/17. In fact a total of £2.6 billion in tax is now expected to be paid.
Even those in final salary or Occupational Pension Plans will face choices as to whether they draw their benefits in accordance with the scheme rules or opt for potentially greater freedom by transferring their funds to a personal pension arrangement which offers greater flexibility.
If you would like to learn more about the way in which pension benefits can be drawn or the issue of pension transfers please contact Shaun Bell or Stuart Read at Sabre Financial on 01548-856444 or via email at firstname.lastname@example.org or email@example.com.
Sabre Financial is a trading title of Sabre Financial Planning Ltd. Sabre Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
By Sabre Financial | Wednesday, July 26, 2017