23rd January 2018
Ignorance is not bliss when money is involved, especially when that money is supposed to support your lifestyle when you finish working.
Research from Old Mutual Wealth shows that:
- 47% of 50-75-year-olds either haven’t heard of Pension Freedoms or don’t know how they affect their pension and options
- Almost two fifths (37%) say that they don’t know when or how they can use Pension Freedoms
Why does that matter? Can’t we just let them carry on doing things the way they have always been done?
No. Pension Freedoms has opened a lot of opportunities for both those who have already retired and those making financial plans in time to retire.
What are Pension Freedoms?
It has long been the norm that Defined Contribution pensions, such as:
- Personal pensions
- Stakeholder pensions
- SIPPS (Self-Invested Personal Pensions)
Were used to purchase an Annuity when the holder chose to retire. This meant swapping all the money saved for a guaranteed income until the holder died.
However, Pension Freedoms was introduced in April 2015 and changed that idea. The reforms meant that people had far greater flexibility in how they accessed their pensions, meaning that fewer people chose to purchase an Annuity.
The options open to those using Pension Freedoms to access their fund early can choose to:
- Leave the savings invested and use other income streams to support their lifestyle
- Buy an Annuity
- Take a tax-free lump sum of up to 25% of the pension pot, placing the balance in Flexi-Access Drawdown, and drawing an income as necessary
- Take the whole amount in one lump sum (25% will be tax-free, but Income Tax will apply to the rest)
How do the options weigh up?
Pension Freedoms have brought about the biggest changes to pensions in a generation. But, that does not mean that using the new options will suit everybody.
If they are used correctly, by somebody who has the lifestyle and plan to support it, Pension Freedoms could assist with:
Retiring early: In a way which is more flexible and suited to your lifestyle
Leaving larger legacies to loved ones: Through financial planning and with the right strategy, having full control over your pension fund could allow you to leave more for your beneficiaries than an Annuity will provide
Helping loved ones sooner: Being able to access lump sums means that you can offer a helping hand when it is needed
Achieve long-term goals sooner: Such as redecorating, home renovations or taking the trip of a lifetime
However, if Pension Freedoms are used incorrectly, you could run out of money too soon, leaving you with little to nothing to live on during the later years of your life.
It can be tempting to take all the money and use it straight away on things which will make you happy. However, 78% of over-50s significantly underestimate their life expectancy (Source: Retirement Advantage). This means that there is a real danger of using the money you have saved throughout your life within the early years, leaving nothing to pay for the essentials as you get older.
In later life, you are more likely to suffer from ill health and may even need to pay for professional care, assistance or living arrangements. These can all bring hefty bills, which you will need to account for as you plan your retirement income.
What is the best decision for you?
There is no one-size-fits-all solution, which is why the range of options brought forth by Pension Freedoms is such a revolution. Where there was previously a single, mainstream option, you are now free to access your pension in a way which suits your needs, lifestyle and aims.
In order to decide how to access your pension when it becomes available, you should:
Educate yourself: There are many sources of information about Pension Freedoms, including government and online sources. Don’t be afraid to dive in and pick up as much information as possible. Just make sure that it comes from a reputable source. In addition, you should…
Take advice: Independent financial advice is invaluable. Especially when your retirement finances are concerned. This money needs to support you for the rest of your life, so why leave it to chance?
Have an open mind: Just because Annuities were fine for everybody a few years ago, does not mean that they are the ultimate solution for you. When talking to an adviser, try not to get caught up in the idea that ‘new is bad’, and look at how these opportunities can benefit you.
To discuss your retirement planning further, get in touch with Ben.