Pensions Freedom – Key questions answered
As people look to take advantage of the new rules, there have been no shortage of questions, here are the top 10 which we are asked on a regular basis:
Question #1: Should I still consider buying an Annuity?
Yes, for many people, who want a guaranteed income for life and can’t afford to take any risk with the value of their pension fund, or their income, an Annuity might still be the right option.
For other people, buying an Annuity with part of their pension, so that the income it produces, when added to the State Pension, covers essential expenditure is valuable. The remaining pension pot can then be drawdown as and when it is needed to meet discretionary and variable spending, whilst providing an element of flexibility.
Annuities have developed a bad reputation. But for many people, especially those who are older or in illhealth, they may well provide the highest level of sustainable income available.
However, if you do choose to buy an Annuity, take advice, shop around for the best rate, consider all other options and make sure the Annuity provider considers your health and lifestyle.
Question #2: Should I transfer my Final Salary pension?
This is a question which can only be properly answered after you have received independent financial advice.
However, for most people, transferring a Final Salary or Defined Benefit pension will not be in their best interests.
If you have one of these pensions, you should also be careful not to fall prey to unscrupulous people looking to scam you out of your pension, by convincing you to transfer to an alternative arrangement which isn’t in your best interests.
Question #3: Can I pay more into my pension before I retire?
Yes, but there are limits.
As the rules currently stand, you can pay in an amount equal to your pensionable taxable earnings or £40,000 each tax year, whichever is lower. Be careful though, if you take any income from your pension under the new Pension Freedom rules, the maximum you can then contribute falls to the lower of your pensionable income and £4,000 each tax year.
In certain circumstances, it might be possible to make higher contributions using ‘carry forward’; a tool which allows you to use up allowances from previous years. If you wish to make large pension contributions our advisers can explain ‘carry forward’ to you.
If you have no earnings in the current tax year, you can still pay into your pension, but the maximum annual contribution is £3,600 gross or £2,880 net of tax-relief.
If you are considering an additional pension contribution you also need to be careful you don’t breach the Lifetime Allowance (LTA).
Currently set at £1,073,100, the LTA is the maximum amount you can have in your pension before a tax charge is triggered. If your pension fund breaches the LTA and you have not applied for one of the various forms of protection, which we can provide more details about, you will pay tax at a rate of up to 55% when you withdraw money.
Question #4: What if you have already bought an Annuity?
The new rules don’t affect people who have already bought an Annuity, unless of course they die before the age of 75 and included a spouse’s pension when they bought their Annuity, in which case the spouse’s income will be paid tax free.
Question #5: Will all pension providers be taking part?
Many people are concerned that the new rules will lead to an increase in the number of pension scams, particularly in relation to:
- Transfers from Final Salary and Defined Benefit schemes
- Large lump sums being taken out to invest in risky investments
- The purchase of Buy to Let property following the withdrawal of large lump sums
There are several ways to reduce the risk of being scammed:
- Never take advice or buy a financial product following a cold call
- Only take advice from an adviser regulated in the UK by the Financial Conduct Authority (FCA); you can confirm an adviser is regulated by the FCA by checking the register
- Get a recommendation from friends or family
Use directories of advisers such as Unbiased.co.uk or Vouchedfor.