April 2015 will see an array of new choices for those retiring and seeking income from their ‘money purchase’ pension pots. These include personal pension plans (individual and group), retirement annuity plans, AVC/FSAVC, stakeholder pensions and ‘money purchase’ (non final-salary) occupational pension schemes.
From 6th April 2015, where a pension scheme’s rules permit it, there is the option to take the whole pension fund as cash, although you should be beware of the income tax consequences. Usually only the first 25% of a pension fund is tax free.
Not all pension schemes will facilitate the new ‘pension freedom’ – especially older personal pensions, retirement annuities and money purchase company pension schemes. It will cost the trustees and providers too much to do so – plus they don’t want the administration headache or initial and ongoing advice liabilities.
Transferring an existing pension scheme to one offering the new flexibility is a potential route around the limitations of old ‘legacy’ pension products, however care is required and you should seek whole of market independent regulated pensions advice first. Few insurers will accept pension transfers where no regulated advice has first been sought.
You don’t need to be physically retired to be able to access benefits from a personal pension – but you do usually need to have attained the age of 55 plus.
These are our top 10 retirement income tips:
1. Plan – what will you need each month to live off? It’s worth listing your estimated annual expenditure then building an income plan to meet this. It may also be worthwhile considering any potential one-off expenses such us paying down mortgage debt, paying for children’s weddings and also thinking about any potential long-term care costs. It is better you outlive your money than your money outlives you.
2. If you’ve not been to the doctor for a while – even if you feel healthy – get a health check now. Certain conditions, including high blood pressure and high cholesterol may qualify you for an enhanced income for life (from some – not all – insurers). Even if you don’t think you’d ever buy an annuity type plan, it is worth doing this anyway for your own peace of mind (and a long and healthy retirement). Your own doctor can advise or there are fee-based private GP services also.
3. Check if any of your older pension plans include what is known as a guaranteed annuity rate – this could offer you an income well above the going rate in the market. Several plans issued in the 1970s and early part of the 1980s include this feature. The ‘shape’ and permitted features of a guaranteed annuity might be restrictive. Seek regulated pension advice.
4. Don’t buy your pension income from the insurer you are already with – without first shopping around. You can move your fund to the insurer offering the highest income or a more flexible income option which might better suit your needs. Enhanced annuity rates can be granted based on smoker status, your health or even your job/postcode area.
5. Consider securing all your basic living needs with a guaranteed income – perhaps supplementing the basic state pension and other guaranteed pensions with a conventional or enhanced annuity Check Out Your URL. That way, even if you leave some of your pension fund invested, you can afford to live with the inevitable ups and downs of the investment markets (knowing you should not run out of money).
6. Unless you’re an expert, beware internet ‘DIY annuity’ firms – often they are no cheaper and you are deemed to be self-advising (‘execution only’) so you lose valuable consumer protection. There is usually no more work in arranging a £50,000 annuity versus a £500,000 annuity – so see if your adviser will work on a fixed fee rather than a percentage of your fund for advice & implementation. A lot needs doing so many advice firms will have a minimum fee.
8. Even if income is your priority and not tax free cash – then taking the maximum tax free cash (typically up to 25% of the whole pension fund) and using that to buy a more tax efficient purchase life annuity or reinvesting for tax efficient investment income should also be considered (rather than using all the funds to buy a guaranteed secure income or leaving all of your funds in flexible access drawdown drawdown).
9. If your pension fund is invested – and it appears likely you will buy a secured income (annuity), consider switching out of investment funds to a cash or deposit style fund so as to minimise the impact of a sudden market fall. Most insurers permit a free fund switch (although do check for any penalties – especially on older pensions and with profit style funds).
10. Beware the ‘advice gap’ – if your pension fund is less than say £100,000 in total, cost effective expert help may be harder to come by or will often be accompanied with a minimum fixed fee. The level of work carried out by an advisory firm should not be underestimated. The cost of regulated advice and a profit margin need to be factored in.
On larger pension funds especially, it can be argued that there are simply too many pitfalls (and risks) to attempt self advising in this complex area. The wrong decision could cost you and your family dear.
Wishart Wealth Management are retirement income experts.
The author, Iain Wishart, is a Chartered Financial Planner and Certified Financial Planner CM professional at Edinburgh-based independent financial advisers Wishart Wealth Management Ltd.
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