Financial planning

How to make the most of pension freedom

Colin Dyer

If you’re approaching retirement, changes that came into place in April 2015 opened up a whole new world of possibility when it comes to your pension options.

 

Pension freedoms were widely publicised around the 2015/16 new tax year, with the media fearing that the power to withdraw all their money would encourage retirees to blow their whole pot on a Lamborghini, leaving them nothing to live on.

However, three years on from the introduction of pension freedoms and this fear doesn’t seem to have been realised. Those who chose to take all of their money out in one go tend to have a smaller pension pot, with 60% having less than £10,000 in their fund – which hasn’t quite resulted in the roads being flooded with super cars. Indeed, many people who are accessing their money aren’t taking it out to spend it; over half of those who withdrew their whole pot either invested it, put it into a savings account, or spent it on property.

However, despite the good news story of people not squandering their hard earned savings, there is still a great deal of confusion around what pension freedoms mean. Almost two-thirds of over-55s have said they are confused by pension legislation. With this in mind, I have rounded up seven key considerations when it comes to pension freedoms.

1. Don’t miss out

Talk to your financial planner to make sure you know which of your savings can access the new pension freedoms. Older pensions should be reviewed to understand which contracts can support the new flexibilities.

2. Know your goals

To make sure you’re on track to meet your retirement goals, it’s wise to review your investments and the income they’re likely to generate in retirement. Be clear that your financial planner understands your ambitions for retirement so they can spot if things are going off-track and can take action. Remember, the value of investments can go down as well as up and could be worth less than invested.

3. Consider bringing your pensions together

To make the most of the new rules you might want to consider transferring pensions that don’t provide access to all the options available. If you have multiple pension pots this could also be a good catalyst to think about tidying them up, making it easier to monitor value and how it’s invested. However this might not be the right thing for everyone so it’s important to talk to your financial planner first, to make sure it’s right for your personal circumstances as transferring could mean giving up any valuable benefits or guarantees.

4. Review, review, review

All of your savings and investments will benefit from a check-up. Your investments should be reviewed regularly and it’s worth establishing whether you may benefit from moving some of your ISA savings into your pension in order to maximise the tax reliefs and allowances available to boost your overall savings. You should also take the time to ensure that your trust arrangements and pension death benefit nominations ae up to date. Due to new pension death benefit options, you may wish to work through these decisions with your family or other intended beneficiaries.

5. Agree a clear withdrawal policy

Pension freedoms provide more choice when it comes to your pension pot including accessing cash, keeping your savings invested, drawing a flexible income, buying a fixed income or a combination of these options. Your financial planner will be able to talk you through the options and help you create a strategy which provides the income you need while using your investments efficiently.

6. Optimise withdrawals

We can help you consider the order of investment portfolios used to support withdrawals to minimise tax and investment risk for income optimisation.

7. Beware of scams

More flexibility for you can also mean more opportunity for scammers. I’ve previously written a blog about spotting the signs and protecting yourself. It’s worth a read to know what to look out for.

Getting the best from retirement planning is complicated, and the need for advice has never been greater. Tax is one of the most important factors when it comes to taking money out your pension, with many not fully appreciating the tax implications of exercising pension freedoms.

While you can now access you’re whole pot, the first 25% is tax free, with the rest subject to income tax of 20%, 40% or 45% depending on the amount involved. It’s important to remember that tax rates will be different for taxpayers in Scotland. Making a one-off withdrawal can also subject you to an emergency tax code which can result in too much tax being paid upfront – although you can claim a refund from the HMRC website.

Your financial planner will help you identify your goals, using them as the basis to consider the most effective method for tax optimisation when you come to withdraw from your pension. They will also look at investment volatility management, tax wrapper and portfolio targeting, client withdrawal policy and estate planning to help you get the most from pension freedoms.

In turn, you should make sure you’re happy with how your plan is progressing as you approach retirement and that both you and your financial planner really understand your goals.

If you have any questions about anything covered in this blog, your 1825 Financial Planner will be happy to help. You can also post a question below.
If you’ve yet to find a financial planner and you would like to find out more about how we can help, please get in touch.

 

Laws and tax rules may change in the future. The information here is based on our understanding in April 2018. Personal circumstances also have an impact on tax treatment. The information in this blog should not be regarded as financial advice.