Esmart Money
Greater responsibility on individuals to plan for financial security in old age
w research[1] has revealed that the number of savers who have embraced their freedoms now exceeds one million (1.04 million). The report from HM Revenue & Customs shows that a record-breaking sum of £7.83 billion was withdrawn in 2018[2], up from £6.54 billion in 2017. It is reported that there have been 5.49 million individual withdrawals since the pension freedoms were introduced in 2015.
Uncontrolled ‘dash-for-cash’
There is, however, currently
no evidence of an uncontrolled ‘dash-for-cash’ that was feared by some when the
freedoms were introduced. The 2018 figure of £7.83 billion needs to be seen in
the context of a total private pension wealth in the UK of approximately £5,000
billion[3].
Withdrawal payments have also consistently averaged less than £4,000 since summer 2017, showing little evidence of savers rushing to buy extravagant luxury items. These freedoms are attractive to younger savers too, with recent figures released[4] finding that one third (33%) of under-35s believe this flexible access encourages them to put more money towards their pension.
Five tips to help make the most of the pension
freedoms
1. Understand your State Pension
The
State Pension continues to be most people’s biggest source of income in
retirement. But the State Pension, and the age at which you are entitled to this
money, is changing – www.gov.uk/check-state-pension.
2. Take your time
You may have spent 40 years saving for
your retirement. Take more than 40 minutes considering your options.
3. Obtain professional financial advice about what you can do with
your pension pot
There are a number of different ways you can take
your defined contribution pension pot. You can usually take 25% of your pot
tax-free from age 55.
Your options are:
Leave your whole pot
untouched
You don’t have to start taking money from your pension pot
when you reach your ‘selected retirement age’. If you want to build up your
pension pot further, you can continue to receive tax relief on your own pension
savings of up to £40,000 each year (tax year 2018/19) less employer
contributions being made, or currently 100% of your earnings if you earn less
than £40,000, until age 75 (beyond 75 for employer/company contributions).
Guaranteed income (annuity)
You can use your pot to buy
an insurance policy that guarantees you an income for the rest of your life – no
matter how long you live. You don’t have to accept the annuity that your pension
provider or pension scheme offers you. The ‘open market option’ allows someone
approaching retirement to shop around for a number of options to convert their
pension pot into an annuity, rather than simply taking the default rate offered
by their pension provider.
Adjustable income
This option is also known as
‘flexi-access drawdown’. You move your pension pot into one or more funds that
allow you to take a taxable income at times to suit you. You choose funds that
match your income objectives and attitude to risk and set the income you want.
The income you receive might be adjusted periodically, depending on the
performance of your investments. The full 25% tax free lump sum can be taken at
outset or you can move funds gradually into flexi-access drawdown and take your
tax free cash in stages.
Take cash in lump sums
Another option is to take smaller
sums of money from your pot until you run out. How much you take and when you
take it is up to you. You decide how much to take and when to take it. You don’t
have to take your 25% tax-free amount in one lump sum – you can decide to
receive it over time. Each time you take a lump sum of money, 25% can be
tax-free, and the rest is taxable.
Take your entire pot in one go
You can cash in your
entire pot – 25% is tax-free, and the rest is then taxed at your highest tax
rate/s (by adding it to the rest of your income). However, cashing in your
pension pot will not give you a secure retirement income. If you’re thinking of
doing this, you should first obtain professional financial advice to discuss
your options.
Mix your options
You can mix different options. Usually,
you would need a larger pension pot to do this.
4. Consider your life expectancy
Pension savings are
intended to last the rest of your life, yet we typically underestimate how many
years we may live. Figures from the Office for National Statistics[5] show that
for 2015 to 2017, a woman’s life expectancy in England from birth remains 82.9
years, and for a man it is 79.2. For men and women in Scotland and Wales, the
latest figures show a slight decline by more than a month. Men in Northern
Ireland have seen a similar fall.
5. Approach final salary pension transfers with caution
If you have a final salary pension, you will need to transfer it
elsewhere to access the freedoms. This is a significant decision, as you could
lose important benefits. Such a decision should be approached with caution and
with the guidance of professional financial advice.
The onus is now firmly on us as individuals to plan our financial security in retirement. We’re now expected to take greater responsibility for funding the time in our lives when we’re dependent on a lifestyle that we’ve spent the last 40 years saving for.
Source data
[1]
https://www.gov.uk/government/statistics/flexible-payments-from-pensions
[2]
Note: this figure underplays the total amount withdrawn as it does not include
any additional amounts taken as tax-free-cash.
[3]
https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/wealthingreatbritainwave5/2014to2016#private-pensions-wealth
[4]
Aviva 2018 survey of 1,000 UK adults: ‘Would you put more money towards your
pension if you were able to access the money more flexibly?’
[5]
https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/nationallifetablesunitedkingdom/2015to2017
ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT. [[[[[[[[[[[[[[[[[[[[[[[[[[A PENSION IS A LONG-TERM INVESTMENT.
THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.