New flexible pensions: why we will not be spending them all at once…
by Alexander Beard, on Sep 1, 2014 4:53:19 AM
Much has been written about the new dawn of pensions flexibility ushered in by the Chancellor in his last budget. Amidst the thunderous applause and cries of ‘long overdue!’ from most pension holders there were, however, stern noises from certain quarters – Labour’s Ed Balls among them – that the overwhelming temptation for many would be to rush out and spend the newly release-able funds on hugely expensive sports cars and exotic once-in-a-lifetime holidays.
No doubt some will yield to the temptation, but it is hardly likely to happen on such a mass scale that the Chancellor will be compelled to bring in emergency measures reversing those he has only just introduced. In a nutshell, these are:
You are no longer obliged to buy an annuity when your pension plan(s) mature; you can continue contributing to a pension fund after age 75; access to, and configuration of, your defined contribution pension plan to suit your needs and tax planning requirements exactly as you see fit.
With the caveat that the new regulations do not apply to final salary schemes such as those of the NHS, they are undoubtedly beneficial for those individuals who do not need to access the totality of their pension pot because they have other investments and funds to draw on. However, both this category of pension holder and those with smaller pension pots – assuming they don’t spend their newly accessible cash all at once – will have to think about the need to manage their income in the most tax-efficient way in order to, respectively, safeguard and maximize funds.
The one thing you do not want is a shock from the taxman when you recalibrate your pension arrangements. For instance, you can unlock your pension and take money out but make sure it’s not such a large sum that will make it subject to income tax being levied at 40 per cent. Better to withdraw funds in smaller, incremental amounts annually over a defined period. You could also convert part of the lump sum into an annuity. Whatever you decide, seek independent professional advice for the most beneficial tax planning, tailored to your needs and requirements.
What the new measures did not affect is that those who already have an annuity are designated as receiving their annual pension income and are locked into that arrangement for the rest of their lives.
Bear in mind that it is unclear as yet whether the changes will make for new, improved annuity deals being offered, or whether less demand (as they are no longer obligatory) will mean insurance companies offer less and less good deals.
It may actually force annuity companies to offer more variety of financial product for pensions, such as retail bonds and Maximum Investment Plans (MIPS).
Remember too that with the new regulations a pension pot can be taken as cash, become part of your estate, and be passed on to your children. Make sure it is invested in a way that avoids inheritance tax, pushing the assets left in a will over the £325,000 threshold – thereby triggering the inheritance levy.
In summary, the main change is one of choice, meaning we have more control over how we want to ‘award’ ourselves what is, after all – our pension pot – something we have worked hard for. That alone will stop most of us spending it irresponsibly, and greater choice is something we should all welcome.
The Financial Conduct Authority does not regulate tax advice.