The rules surrounding accessing pension savings have changed in recent years: annuities are no longer the automatic choice for those looking to secure an income in retirement with their defined contribution or money purchase pension scheme – there are a range of options available. This includes flexible access to pension savings enabling anyone who has reached the minimum pension age (currently aged 55) to draw as much as they wish from their pension pot whenever they wish.
However, many existing pensioners will have already purchased an annuity with their pension savings giving them an income for life. This isn’t necessarily a bad thing: whilst flexibility does bring wider options, there are many advantages to the annuity route as the income generated is generally secure and will never run out. It may also include an income for a spouse and other death benefits.
Flexible Access to Pension Savings
Pension flexibility has been available since April 2015 and allows those with pension savings to withdraw funds directly from their savings – provided they have reached the minimum pension age – rather than buying an annuity.
However, there are important tax considerations: most pension arrangements allow for 25% of the fund free of tax but any further withdrawals are taxed as income. This could potentially lead to pensioners falling into a higher tax bracket if they make significant withdrawals within a specific tax year. Furthermore, if too much is taken from the Pension too soon, thereay not be enough money to last through retirement, so careful planning is important and specialist advice is recommended.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
Pensions can be passed on to beneficiaries after death
A pension can be passed to anyone after death, not just a dependent. Income taken from the pension by beneficiaries will be tax free if death is before the age of 75, and at the beneficiary’s marginal rate if death is later than this. This means that pensions can be used as part of an inheritance tax mitigation strategy.
These changes are good news for pensions in that they remove most of the concerns many people have about their inflexibility. More flexibility means that advice to ensure that your retirement savings are not exhausted and they meet your needs for life, will be more important than before. The right type of advice therefore can make a huge difference so it is important to make the appropriate choices for specific circumstances.
Poundbury Wealth Management LLP offers expert financial advice in investment planning, pensions planning, inheritance tax planning and long term care planning. Contact us at www.poundburywealth.co.uk or call 01305 266866.
Partner Tim Gallego is a member of The Society of Later Life Advisers (SOLLA), a not for profit organisation set up to meet the need of consumers, advisers and those who provide financial products and services to the later life market.
The Partner Practice represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.