With the new pension rules that were introduced on 5th April 2015 comes a new freedom of choice in how to access and utilise your funds in a defined contribution pension. Once you reach the age of 55 you are no longer required to purchase an annuity. Briefly:
• You can take out the whole pension pot, paying no tax on the first 25% with the remainder subject to Income tax rates at 20%, 40% or 45%.
• You can take money out of your pension pot in stages with the first 25% of each withdrawal tax fee, the remainder of any staged withdrawal being subject to income tax rates (the undrawn pot remaining invested).
• If you die before the age of 75 the whole pot can be passed onto any nominated beneficiary without any tax charge. If you die after the age of 75 the pension pot will be subject to tax at the normal rate.
• You can still purchase an annuity with some or all of the pension pot.
With greater freedom and access to pension funds, however, comes potential risks. Advisors need to be alive to their client’s potential tax position and long term retirement income needs when providing advice as to how and whether clients should use and draw
down funds, or whether they should still purchase an annuity.
While there is an obvious temptation to draw large sums down to buy that “dream car” or go on that expensive “holiday of a lifetime”, there is a risk that retirees may ultimately regret enjoying the benefits of drawing down large pension funds early in their
Further, depending on the individual’s own tax position and other income, drawing down additional funds could mean falling into higher tax rates bands and incurring higher tax liabilities than they would otherwise have.
It is clearly too early to predict whether the new pension rules could pave the way for a new wave of mis-selling claims in the future based on poor advice or a misunderstanding of balancing a client’s wants and needs.
The industry may well be wary of what the future holds given the numerous past pensions mis-selling scandals such as the recent concern over mis-sold annuities.
(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice
should be obtained before taking, or refraining from taking, any action as a result of this article.)