Preparation and Planning – The Pension Flexibility Survival Guide

9th February 2016

The new rules for access to Defined Contribution pensions introduced in April 2015 have led to radical changes to the way UK investors manage their capital, and the wise and well advised amongst them have been able to take full advantage of the new flexibility.

For those who do not plan and prepare, there may be problems ahead as they try to get to grips with the complexities of the new rules, so here are a few points to consider when thinking about your pension under the new pension flexibility rules.

Plan how you pay your income tax

The new pension rules allow greater flexibility in how we access our personal pension funds, but the majority of withdrawals are subject to income tax, and in many cases an emergency tax code is applied. You could turn into a 45% income tax-payer overnight, and (in certain circumstances) you could find yourself being taxed at 60% on the capital you withdraw from your pensions. The answer is to take advice on how to manage your withdrawals over a number of tax years.

Make sure your income is sustainable

Where excessive withdrawals are made from pension funds, your risk is that your capital will eventually run out and you will have to get by on State benefits – depending on individual National Insurance Contributions, this will be a flat rate State Pension of up to £155.65 per week (from April 2016).

Don’t restrict your future planning options

The new rules provide several different ways to withdraw your pension capital, some of which can limit your pension saving options in future. An expert independent financial adviser can arrange your withdrawal so that you pay less tax now and in the future, and still have the option of contributing to pensions at a later date.

Avoid fines HM Revenue & Customs

Savers with more than one pension will be required to notify some or all of their other pension providers once they start to draw from one of these pensions. They need to do this within 91 days of receiving a certificate confirming they have taken advantage of the new rules or of starting to make contributions to the plan, if later.

If you do not meet this deadline you could be hit with a fine of up to £300, with further penalties if you delay further!

Ensure your pension passes to your family

The changes to the way that pension capital is treated on death are just as radical as the changes on access for the plan holder.

With careful planning, pension capital can be passed to children and grandchildren tax free. This can also apply to pension assets when a self invested option is adopted – for example, investing in commercial property.

Monitor how your pension capital is managed

Most of us don’t take an interest in how our pensions are performing, possibly until it is too late! The new rules offer very welcome retirement planning opportunities but these benefits can be reduced if your pension is not proactively and effectively managed to deliver the best returns.

Don’t forget about Lifetime Annuities

When introducing his reforms, the Chancellor of the Exchequer famously announced: ‘No caps. No drawdown limits. Let me be clear: no one will have to buy an annuity’. However, Lifetime Annuities will also benefit from significant changes under the new rules, including the option to pass benefits on, tax free, to nominated beneficiaries. This means that Lifetime Annuities will still be the best solution for many retirement strategies and should not be rejected without full consideration.

Don’t miss out on guarantees

Many older pensions include valuable guarantees such as Guaranteed Annuity Rates which provide relatively high levels of guaranteed retirement income with no investment risk. These have to be considered when developing your retirement strategy.

Make use of all your options

The flexibility of modern pensions means that you do not have to make a straight choice between the options available; you can apply your pension capital to more than one solution. For example, you can use part of your capital to provide a no risk sustainable income via a Lifetime Annuity, and part to provide flexible access to your capital under the new rules.

Make sure you understand the risks involved

Unlike Lifetime Annuities, the new flexible pension options will leave the plan holder exposed to investment risk. An independent adviser will discuss investment risks with you and manage your portfolio so that your investments are consistent with the level of risk you are prepared to take.

Integrate your pensions and investments

The new rules will change the way we think about different investments, and for many investors their pension will become more important than their ISAs. The answer is a holistic approach to wealth management that applies a unified investment strategy to all your assets and provides ongoing advice on how, and where, to invest your capital efficiently and effectively.