Pension Freedom

This week Craig is joined by Jason Murgatroyd, Financial Adviser at CS Retirement Solutions to talk about Pension Freedoms.

What is Pension Freedom?

April 2015 saw a complete shake-up of the UK’s pensions system, giving people much more control over their pension savings than before. At that point pension freedom was made available from the age of 55.

At age 55 you can now access your pension pot, which for many people is a positive move. When today’s 55 year olds set up their pension they thought they couldn’t retire until around 65.

When is the Pension Freedomage going to change?

The pension freedom age is generally ten years below state retirement age. The state pension age will soon be increasing to 67, and the pension freedom age will also increase to 57.

Legislation is always changing so take advice, speak to an adviser for the latest developments.

What can you do at Pension Freedom age?

There are many options available to you. The first of course is not to take any money from your pension yet. Not everybody needs this money at 55 and it’s advisable to leave it to look after you in old age.

It also depends what sort of pension scheme you have. There are certain company pension schemes that are difficult to access, such as final salary schemes. For Pension Freedom to apply you need defined contribution schemes or money purchase schemes.

If you have this kind of pension the options are to take a cash lump sum, or set up a regular income – for example if you are reducing your working hours and want to top up your income each month. There are some tax breaks as well as benefits. An amount of that pension pot – 25% – is completely tax free.

What are the main tax considerations?

Outside the 25% lump sum, pension income is taxable at your current income tax rate. So if you’re looking at taking the tax free cash lump sum plus pension income on top, be careful.  If you’re close to the higher rate tax threshold, taking extra pension income on top can take you into the higher rate tax band.

There are lots of options to consider. You don’t have to take the full 25% tax free cash sum, you can just take 10% now and more later.

Can I use the lump sum to pay off my mortgage?

This is one of the most common ways the lump sum is used. It’s not always the best way to invest the money, but it is certainly popular.

Other people might spend it on a once in a lifetime holiday, a motorhome, moving house – it’s their money after all. But it’s also important to think about the future. Sit down with a financial adviser and explore the pros and cons before making a decision.

Why was Pension Freedom introduced?

An important reason is to encourage young people to start paying into their pension. At 20 or 25 the idea that you can’t access your money until you are in your late 60s can be off putting. Making the age lower can tempt people to plan ahead.

If I take my 25% tax free sum at 55, when can I take more?

You have the freedom to do what you want with the money – you can take the whole pension pot if you wish – but of course the money will be subject to tax.

The most tax efficient way to access the whole fund may be in the form of regular income, using outstanding tax allowances to take the money as efficiently as possible.

If I take a lump sum from my pension, can I change my mind and put it back in?

Yes, this is possible, but you need to be mindful of tax limits – we’re limited to how much we can pay into pensions by tax relief. HMRC wouldn’t let you take tax free money from a pension fund and then pay it back in, claiming tax relief.

How long does it take to access the fund?

Under normal, pre-pandemic circumstances it would take six to eight weeks to access your money. Since lockdown this has sometimes taken as long as 12 to 16 weeks.

In terms of the process, the first stage is to sit down with an adviser, who will know the current timescales and give you a rough idea. Generally, however, it pays to plan ahead and give yourself plenty of time.

How can I get ready to access my pension?

First, check that you’re still receiving an annual statement from your pension provider. If not, you need to dig out old records or perhaps contact previous employers to locate your pension funds.

Next, find a reputable pension adviser and they will sit down with you and explore your needs and objectives. Your adviser will then contact the pension providers with a letter of authority from you to say that they can look into your pension affairs.

Do I have to go through a Pension Adviser?

Pension providers are governed by a policy that if your pension pot totals more than £30,000 you need to take pension advice. But if your pot is under £30,000 you can go straight to the provider and arrange access yourself.

What does it cost to use a Pension Adviser?

The first consultation is free of charge, but as the plans progress you will sign a contract and be made fully aware of the advice fees. Often the advice fees can come from the pension funds once released.

So if you’re thinking about your options once you reach 55, reach out to us for a chat and we can help you narrow down the choices.