Now that the new pension flexibilities have been with us for two months, a lot of the devilish details have now come to light.
So, what are the flexibilities? Well, that depends upon what type of pension you have:
- Defined Benefit / Final Salary – Due to the underlying guarantees you have within these schemes, the full flexibilities are generally not available to you. If your scheme is from the private sector, or is a ‘funded’ public sector scheme, you may have the choice to transfer out in order to access the flexibilities via a different type of pension arrangement.
- Other Pensions – There are lots of names for the other types of pensions, but the most common are generally known as personal pensions or SIPPs. These schemes can offer full or partial flexibility to you.
In a nutshell, the new freedoms allow you to take what you want from your pension, when you want after age 55. Twenty five per cent of the fund taken will be your tax free amount; the remainder will be treated as an income payment and taxed accordingly. Generally, people already in drawdown will be able to access the new flexibilities quite easily; existing annuitants will have to wait a little longer to see if they can access a pot of cash instead of their guaranteed income.
Whilst this breaks the issue of people not liking pensions because they cannot get their money back, it does place a lot of responsibility back on the individual to ensure that they have thought this through.
Things you should consider should include:
- Can you meet your cash requirement from another source?
- Do you have sufficient other income to meet your expenditure requirements, both now and in the future, to allow you to cash your pension in?
- Do you want to continue to pay in to a pension? By taking money out, the maximum tax efficient contribution will decrease.
- Do you receive any means-tested benefits? The amount you take that is not tax free is deemed to be income and so should be declared and will affect these benefits.
- Can you afford to pay the tax? Following changes introduced by HMRC, not all pension providers can accurately deduct the correct amount of tax. This usually results in a large overpayment to HMRC. You then have to reclaim the overpayment back – essentially, do not expect a straight forward 20 per cent to be deducted, it could be up to 45 per cent.
So, at the end of all of that, yes you can ‘have your cake and eat it’, but it could add a serious amount of weight to your worries (do you see what I did there!) – both now and in the future, if you do not have all the facts and plan accordingly.