I just wanted to remind clients of the changes that have come about since the Chancellor announced the new pension rules effective since April 2015. These are quite radical and the new rules allow everyone to take their entire pension pot as cash at retirement, which has turned the world of annuities upside down.
Up until this year, people who contributed into a pension were obliged to buy an annuity, “an income for life”, by the age 75. This caused a lot of unhappiness among those forced to lock their pension savings into today’s all-time low rates. But since April 2015, anyone aged over 55 can take 100 per cent of their pension as cash. This applies to both personal and workplace pensions, although not to final-salary pension schemes.
As before, you can take 25 per cent of your pension free from income tax, but the remainder is taxed as income for that tax year in which it is paid.
Annuities may still appeal to those who want the security of knowing they will receive a guaranteed income for life, no matter how long they live. The risk for those not opting for an annuity is that they could spend the entire pension pot while still having years to live.
If you are approaching retirement, one option could be to use part of your income to buy an annuity, then keep the remainder invested. Another option is to transfer your pension to an income drawdown scheme, which allows you to take income from your pension fund while keeping it invested. You can still take out a traditional annuity, but once you have committed to this, you are stuck with it for life.
I guess only a small percentage of people will opt to take all of their funds in a single go, planning to use the money sensibly, by investing in tax-efficient individual savings accounts (ISAs) and buy-to-let properties, or paying down mortgages and other debts.
Beware of the tax sting in the tail. You may end up paying 40% tax on a large chunk of your pension savings if you are not careful.
Why not give me a call or drop me an email for some advice so that we can help you make the right decisions.
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