In recent years we have become used to the Budget offering little in the way of significant change. However this year the Chancellor surprised many through his sweeping changes to pensions. This has certainly grabbed the headlines and there are undoubtedly some great opportunities for those saving towards their retirement. It is good news for us too as a business, but whether Mr Osborne has gone too far with ‘pension liberation’ will perhaps take many years to establish.
Beware those who act on the headlines only. There is always the small print; important facts that didn’t make the headlines.
Recent surveys show that most people drastically underestimate the fund of money that they will need in retirement. This is, after all, a complex calculation that needs estimations of longevity, income needed in retirement, inflation, investment growth and investment charges to be taken into account. Most people just don’t have this information to hand, so we do have a concern that those who do not work this out or seek advice run the risk of running out of money. Although the Government has set aside money for the provision of ‘guidance’, we do not think that it is enough and do remember that ‘guidance’ is not advice.
From the perspective of pension savers, being able to withdraw unlimited sums from your pension fund at the age of 55 seems attractive. There are however some warnings:-
Withdrawals in excess of 25% of the pension fund (which can be taken as tax free cash) will be added to your income for that year and taxed accordingly. About 80% of the enquiries we receive seem to miss the fact that taking all the pension fund in one go would probably result in them being a higher rate tax payer in that year.
Pensions are a vehicle to save money in a tax efficient environment in order to create an income for the rest of your life.
The positives are that there are some great planning opportunities. For example; the prospect for higher rate tax payers receiving 40% (or more) tax relief on contributions yet possibly only paying 20% tax in retirement.
Despite negativity around annuities, we feel that there is still a place for them as they create the certainty of a guaranteed regular income for the rest of your life. We believe annuity rates will become more competitive and will continue to play an important role in retirement planning.
So having greater control of your finances in retirement is a welcomed development, but don’t spend it all at once!
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Mark Penston BSc, AFPS, MEWI (Partner) – Chartered Financial Planner
Specialist in investment, pensions and financial aspects of divorce.
Mark is a Chartered Financial Planner and has spent over 20 years assisting clients with their financial planning needs. As well as his investment work with clients Mark works closely with lawyers and their divorce clients who need assistance on how pensions and other assets should be divided on divorce.