April 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 6 April, they can access the new ‘freedom & choice’ with their pension. Many will 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 some individuals will have to transfer to a modern, flexible defined contribution (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 individuals will demand greater choice and freedom over how they use their pension fund to provide for them in retirement – and create a legacy for their loved ones when they’re gone. But they may have to trade-up to get it.
Healthy income options menu
The new rules provide a range of options on how income can be taken, in addition to the conventional lifetime annuity option.
- 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. And the wealthier you are, the less need there is for guaranteed income (which can end up being a guaranteed tax bill).
The UFPLS sticking plaster
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 is simple and pain free.
Having income which is paid at the right time 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 when you begin to take income will be the ability to monitor and track performance and sustainability. With many individuals often acquiring a number of different pensions throughout their working life, having a single view of the 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.
Before recommending a consolidation exercise, any costs of transfer must be considered. In particular, watch out for guarantees under older plans that could be lost. But don’t let the tail wag the dog. Weigh-up the value of any guarantee against the benefits of consolidating. And consider what excess return would be needed to recover any transfer ‘penalties’.
Time for a check up
It’s easy to think that you have time on your side to get your pension 2015 ready. You may not need to access the new income flexibility for several years. But what if you die before taking your benefits? You could be trapped in an out-dated contract where the only options may be a lump sum or a dependant’s annuity. And your family could be missing out on 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 ’15.
Source: Standard Life