By Tony Watts OBE, Director of www.retireeasy.co.uk
According to new research carried out by the consumer watchdog Which?, one third of over-55s have so far been contacted by potential fraudsters since the Government’s pensions reforms have come into force. It’s easy to see why: the prospect of hundreds of thousands of us being presented with far greater freedom to use their pensions pots is a tempting prospect for the purveyors of dodgy products and services. Already many have fallen victim to the siren calls of releasing money in order to reduce debts, to reinvest in schemes promising high returns or simply to splash a little cash.
The reality of pensions freedom, of course, is that it lags a little behind the promise. Yes, the new legislation has been warmly welcomed by all in the pensions sector and by older people themselves, and marks a huge stride forward. But the market has been struggling to catch up with demand and there are very few new products out there to replace the old style annuities. That means if someone calls you up with a tempting sounding scheme which sounds too good to be true… it probably is. The expert advice of an independent financial adviser is always recommended: you will need to pay for this, but it could prove a wise investment longer term.
You have five main options when it comes to your pension savings, and with most providers, you can start making decisions when you reach age 55. Be aware that some providers may not offer you all of the options below at present, or charge you for the privilege. Above all, make no decision quickly or without expert advice, and beware cold calls.
1. Cash: take out your whole pot as a cash lump sum
Not all pension schemes offer this as an option. And remember that only the first 25% is tax free: the remainder may be taxed by as much as 45% and could also affect current benefits.
2: Take lump sums annually
You could continue taking out lump sums from your pension pot for the next few years, and not pay tax on the first 25% of each sum. While this would allow you to put your money in other investments, you may well incur administration charges.
3. Take out 25% tax-free and invest the rest
The cash you release can be used either to reduce borrowings, invest elsewhere or spend as you wish. Do remember that if you spend it or invest it unwisely, this may well mean losing a part of your retirement income. The remainder of your fund can stay where it is or can be transferred to a different pension plan. Also, don’t forget that pension funds are tax effective and generally IHT-free on your death.
4: Do nothing
New products will be coming along shortly to fill the gap, so you could leave your money intact or arrange with your provider to draw out sums within your 25% limit to keep yourself in funds and avoid a potential tax charge. You may not be getting the very best returns where it is, but it represents a safe option.
5. Transfer it
If you can find a better place to invest your savings, and the scheme is genuine, then this could be a better option. However, the new pension plan should be compelling and don’t transfer for the sake of it.
Check before you choose!
The first step is to go to the excellent new Government website www.pensionwise.gov.uk which sets out your options in more detail, and you can start the process of contacting an advisor who will signpost your next moves. These moves include speaking directly to your current provider to see what choices they offer, and also to speak to an independent financial adviser – not least to determine what impact taking out funds might have on your current and future tax and benefits liabilities, as well as the future financial well being of your family.
Those with a small pension pot can get advice from Tax Help for Older People, free of charge: www.taxvol.org.uk.
If you want to know precisely how much you will have to live on for the remainder of your life, depending upon which route you take, the free online programme www.retireeasy.co.uk can do all that for you – showing you the various scenarios in detail. Importantly, this will establish how much you can afford to take out without compromising your future financial wellbeing… or whether you really should remain in the workplace to keep your funds topped up!
To help you avoid being scammed, the Financial Conduct Authority holds records of all companies registered with them (http://www.fca.org.uk/register or call 0800 111 6768)
And for those of us who already have annuities in place…
While no changes are currently possible, the Government has signalled that changes are on the way, opening up additional options in the future.