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HAPPINESS IS FREEDOM
by Sam Hulson of First Equitable
‘ The secret to happiness is freedom ’ wrote the ancient Greek historian Thucydides . And with the introduction of the pension freedom rules , those aged over 55 now have far greater freedom of choice over how they use their pension pot to fund their retirement years .
When pension freedoms commenced during the tax year 2014 / 15 , it dramatically changed the pensions landscape . How people can now access their retirement income is substantially different from previous generations . On the one hand , pension freedoms have made it much easier for people to access their pension pots , and as a result some may think they can do it themselves .
CONVERTING A PENSION POT INTO CASH AND INCOME On the other hand , the reality about how best to convert a pension pot into cash and income is one of the most complex decisions in personal finance , and it is simply too difficult for most people to do without expert , professional financial advice . Worryingly , half of Britons aged 55 and over ( 51 %) admit they know little about the pension freedom rules introduced in April 2015 , according to new research [ 1 ]. A further one in ten ( 10 %) over- 55s say they know nothing about the changes , which represented a complete shake-up of the UK ’ s pensions system five years ago .
FREEDOMS LET PEOPLE ACCESS THEIR PENSION POT Just a third of over-55s ( 34 %) can remember the changes taking place . The research also found that women are less likely to know about the rules than men , with 58 % over the age of 55 admitting to knowing little about them compared to 43 % of men .
The pension freedoms let people aged 55 and over access their Defined Contribution or Money Purchase pension pot in whatever way they want . The biggest change is that people aged 55 and over can withdraw their entire pension pot as one lump sum . However , there are likely to be charges ( tax implications ) for cashing in your whole fund , and not all pension schemes ( particular workplace pensions ) or providers will offer this option .
GREATER ONUS ON PEOPLE TO KEEP THEMSELVES INFORMED Money Purchase pensions include Personal Pensions and Stakeholder Pensions . Your contributions are used to build up a pot of money , and you choose how and when you want to use that pot . They don ’ t include
Defined Benefit pensions , where the amount of income you receive is linked to your salary and length of service .
With greater freedom comes greater responsibility . There is now more onus on people to keep themselves informed of their options when it comes to accessing their pension money . You need to make sure you have enough to live on throughout your retirement , and that you can provide for any dependants after you die .
LIKELY TO TAKE A TAXABLE LUMP SUM IN RETIREMENT Under the rules of pension freedoms , you can access your pension from the age of 55 . If you choose to take a lump sum from your pension , 25 % of the amount you withdraw will be paid tax- free , while the remaining 75 % is taxable .
Looking ahead , 35 % of adults aged between 45 and 54 say they will probably , if not definitely , take a tax-free lump sum from their pension at some point . Of those , 30 % will do so as soon as they reach 55 . Meanwhile , 15 % of adults aged between 45 and 54 say they are likely to take a taxable lump sum in retirement . Of those , almost a quarter ( 24 %) plan to do so as soon as they get to 55 .
A NEST EGG CAN BE CONSIDERED A BIG ACHIEVEMENT In the current economic climate , some may be tempted to dip into their pension savings as soon as they can . With more people retiring with debts and mortgages to pay , the decision to access this requires serious thought . Perhaps the biggest difficulty in managing your own retirement money is guessing how long you will live and what investment returns you might expect . By many estimates , you are going to need at least 70 % of your income in retirement . Unfortunately , in our society of instant gratification , where keeping up with the Joneses is more important than saving money for the future , for many having a nest egg can be considered a big achievement .
If you would like to review your financial plan please contact us to arrange a free consultation . You can also email me at sam . hulson @ first-equitable . com
Source data : [ 1 ] Standard Life ’ s research of more than 2,000 UK adults found 35 % of Britons aged between 55 and 64 have already accessed their pension pot , prior to State Pension age . wirrallife . com 21