Pension freedoms: the risks of not taking appropriate advice
The biggest pension changes for generations only came into force on 6 April – but with greater freedom comes more risks.
The changes at a glance
The rules have changed about what you can do with your pension money, whether you have pensions in place or money set aside for a pension plan. You’ll have more choice and control when you reach age 55 – but you should make sure you are ready for changes, which may dramatically affect your future.
You can now:
• Take the whole fund as cash, with 25% being tax free
• Use some or all of your pension to buy a guaranteed income for life if you want to
• Withdraw any amount you like, over any period of time
• Take out one or more lump sums however you like, with 25% of each being tax free.
How you take your pension could have many consequences, including putting you in a higher tax bracket even if that is not normally the case. Other changes like the abolition of the 55% death tax (you can now pass on unused pension savings to a loved one tax free), new pension contribution rules and the tax treatment of annuities could also have a meaningful impact on your circumstances. Yet a recent Brewin Dolphin survey conducted by YouGuv showed that only 36% of 55-65 year olds are likely to seek financial advice.
The complex pension landscape makes it more important than ever to have access to advice that is tailored towards your situation.
Tim Walker Divisional Director and Head of Office at Brewin Dolphin in Exeter is recognising an increased demand for clear guidance. “There are a lot more people seeking straightforward advice. Many current pension arrangements are just not suitable. Previous safeguards gave people confidence that their future was assured to some degree – but by removing these, people need to act sensibly to help ensure their pension fund lasts them through retirement.”
The risks of doing nothing, or acting without caution
You may decide to leave your money where it is and to continue with the plans you have for retirement (taking an annuity has been the traditional route). But you could miss out on opportunities as well as expose yourself to unnecessary risk. Be aware of situations that could affect you.
- Don’t pay more tax than you should. You could pay thousands of pounds more by withdrawing all of your pension pot(s) in one go. At any time, only 25% of what you withdraw is free from tax. The remaining 75% is treated as income and subject to income tax – but there may be ways to reduce what you pay.
- Make sure you have enough to last. If you retire too soon you may not have enough to last for your retirement. Delaying your retirement for a few years could make all the difference. Traditionally, most people were forced to buy an annuity to sustain their retirement, but now you don’t have to. See how long your pot could last with our calculator and find out which options could work best for you.
- Avoid unnecessary gambles. Investing properly for the future requires skill and insight. Make sure you are not tempted by questionable schemes or be stuck with a buy-to-let property you can’t sell or rent out.
- Beware of inflation. Leaving your pension in a bank account could expose you to inflation and have a serious impact on your retirement pot. So it’s worth exploring the different ways you could make your money work harder to ensure your pension doesn’t diminish too quickly.
“The main risk for people is running out of money,” says Tim Walker. “Clients are often in the dark about structuring their income and they frequently underestimate how long they will live and the long-term impact of inflation. We talk people through their options, making sure they can maintain their lifestyle first of all, and then look at discretionary spending and their legacy wishes.”
It’s important to be mindful of your individual situation. Because of varying incomes and outgoings, tax and family circumstances, what works for someone else may not suit you. There are serious risks of not taking appropriate advice – but the right advice could easily pay for itself.
