With all the recent changes in the pension’s world, are you clear about what do with your pension?
Over the past 18 months, the choice of what you can do with your pension has expanded significantly. You now have much more flexibility about when you take your pension and what you can do with it.
You can now take the whole of your pension fund as a lump sum after age 55, (rising to 57 in 2028). The first 25% will be tax free, with the rest subject to tax at your marginal rate. So you now have a choice between withdrawing all your pension money immediately, leaving it invested and taking income when required, or buying an annuity to give you a secure income for life. You can also mix and match, putting some into an annuity to cover your essential costs, whilst opting for a variable income via income drawdown with the rest of the fund. Income drawdown rules have also changed and are now more flexible.
Another option is to take lump sums directly from your pension as and when you wish. This is called an Uncrystallised Funds Pension Lump Sum (UFPLS). 25% of each withdrawal you make will be tax free with the rest taxed as income at your marginal rate. The balance remains invested, and can provide a variable income, although the fund value and future income is not secure.
If you are not fully aware of all the options available to you, and what is the best route for your particular circumstances and needs, getting pension advice might be sensible.
It may be that you also have several different pensions, which makes it more difficult to keep track and manage your investments. In some cases it can make sense to consolidate your pensions and manage them from one pension pot.
Before you do so, it is crucial to fully understand what you hold, where it is invested and any valuable benefits that you might give up by transferring. This can be a daunting prospect for many, so getting your financial adviser to help you review your situation and then produce a bespoke plan designed to help achieve your retirement goals could pay dividends.
You might also need financial advice if you are over 50 and the value of your pension pot is near, or over, £1m. Next April 2016, the lifetime allowance cap will be reduced from £1.25m to £1m. If you exceed this, there can be a tax charge of up to 55% on the excess, when you come to take the benefits. If you are close to this limit, it is important to understand the options and solutions available to you.
Another outcome from the new pension freedoms is that pensions can now be used to help mitigate the impact of inheritance tax (IHT).
Pension funds used to be heavily taxed at up to 55% on death after 75 or after having taken tax-free cash or an income. However, since April 2015, pension funds are now usually completely tax free on death before age 75. As well as no IHT liability, beneficiaries can normally withdraw money from the pension tax free too. For death after age 75, there is still normally no IHT, but beneficiaries inherit the pension and are charged at their marginal rate of income tax on any withdrawals they make.
So pensions can now be considered as another useful IHT planning tool. It also raises the question as to whether you should fund your retirement via your taxable investments first, and then Isas, ahead of your pension pot. Obviously this is a complicated area and one where you may need financial advice as well.
With the Chancellor due to announce the outcome of a pensions review in the next budget, there could also be changes to pension’s tax relief and possibly to the annual allowance.
To keep up to date with all the latest pension changes and for retirement planning advice, contact Kellands.