Get ready for pension freedom: Half a million people can spend, save or invest money as they wish - but beware of tax traps and fraud
04-07-2015
By Tanya Jefferies for Thisismoney.co.uk
Pension freedom reforms will give more than half a million over-55s the opportunity to take control of their own retirement savings and spend, save or invest them as they wish from today.
The huge overhaul allows older savers unrestricted access to their whole pension pots, and removes the need to buy an annuity to provide guaranteed income for life.
But pension experts warn the freedom reforms bring big and serious risks, like fraudsters stealing people's life savings, baffled retirees paying far too much tax, and the possibility of some treating their savings like a cash windfall and blowing them too fast.
Pension freedom: Huge overhaul allows older savers unrestricted access to their whole pension pots
Savers also won't be limited to one chance to take a single tax-free lump sum worth 25 per cent of their pension pots, with the rest taxed as income afterwards.
Instead, Chancellor George Osborne has announced that people will be able to dip in and make as many withdrawals as they want, each time getting 25 per cent tax-free and the rest taxed like income.
The changes apply to people with 'defined contribution' or 'money purchase' pension schemes, which take contributions from both employer and employee and invest them to provide a pot of money at retirement.
They don't apply to those with more generous gold-plated 'final salary' pensions which provide a guaranteed income after retirement.
The pension freedom reforms were unveiled in last year's Budget, so many people have been delaying their pension decisions until now.
The shopping list of items newly flush pensioners might spend money on is long and varied: new cars, home improvements, cruise holidays, paying off debts including mortgages, investing in buy-to-let properties, buying homes or providing other financial help to children and grandchildren, and paying care costs for elderly relatives.
But experts say that for many people, the best option will be to resist making an immediate dash for their cash. They urged people to take time to carefully weigh up their options.
WHAT IS PENSION WISE?
Everyone eligible for the new pension freedoms will be offered free, impartial guidance from Pension Wise to help them make sense of their choices.
The official service is being delivered face-to-face by Citizens Advice, on the phone by the Pensions Advisory Service (TPAS) and online by the Government.
People approaching retirement with a defined contribution pension pot will be able to get help from Pension Wise online by visiting the Government's Pension Wise website, by telephone by calling 030 0330 1001 and by contacting any Citizens Advice Bureau.
The appointments will be tailored to the person taking part, taking into account the value of their pension and their retirement plans.
Gillian Guy, chief executive of Citizens Advice, said: 'Pension Wise will help people to make sense of their pensions choices.
'To make the most of a Pension Wise appointment, preparation is key - the more a trained guidance specialist knows about someone, the more they can tailor guidance to their needs.
See below for more about the preparations you should make for appointments.
Most pension savers who will have access to new retirement freedoms support the changes - but also fear there could be drawbacks - according to a study from the National Association of Pension Funds.
Some 63 per cent of 850 pension savers aged between 55 and 70 said the reforms are a good idea but there may be some downsides.
Research by PwC has also raised concerns that many people approaching retirement say they are yet to be contacted by their pension provider about the new pension freedom options.
PwC said its findings suggest that either people have not been contacted, or the messages from providers have not hit home and people have dismissed them as irrelevant.
It said many pension providers are likely to have a large inflow of customer requests to deal with as the reforms get under way.
A Treasury spokesman pointed out that it has been made compulsory for firms to point people to Pension Wise. This is the Government's free and impartial advice, which has already begun taking bookings.
Ros Altmann, the Government's business champion for older workers, said the move heralds the 'start of a 21st century pension system, not a 20th century system where the pensions industry and the Government knows best' about what people should do with their money.
Pensions minister Steve Webb said: 'It is right that people should have the power to make their own decisions about how they spend their own money after decades of careful saving - ending the effective obligation to buy an annuity will give people back control of their financial affairs.'
Mr Webb has said that people should be trusted with their own pension pots, but also has acknowledged that someone will 'blow the lot and wish they hadn't'.
He has said he is 'relaxed' about the possibility of people spending their savings on a Lamborghini sports car.
Do YOU want one? Pensions Minister Steve Webb said he is relaxed about people buying one of these sports cars with their pension savings, because he thinks people should be trusted with their own money
David Smith, financial planning director at Tilney Bestinvest, predicted the vast majority of savers will carefully consider their options before deciding what to do.
He said: 'People who have saved diligently across their lives for the moment of retirement do not transform into reckless hedonists at the point of retirement.'
Louise Hanson, director of advocacy at the Association of British Insurers said: 'Don't panic, don't rush and don't be tempted to dash for the cash. April 6 is the start of a new pensions era and not a deadline to act.
'The only sensible advice is to take time to fully consider your options and contact the free, impartial Pension Wise service.'
Laith Khalaf, a senior analyst at Hargreaves Lansdown, also reminded people to consider the tax implications of withdrawing large amounts of cash over a short time period.
Mr Khalaf said: 'If you're a basic rate taxpayer who has built up a relatively large pension (and you cash it in), you could end up paying a higher rate of tax.'
HOW TO GET THE MOST OUT OF PENSION WISE
Citizens Advice offered the following tips on preparing for a Pension Wise appointment:
Step 1. What's your pension pot worth?
You can find out the value of your pension by looking at an annual statement or in some cases going on to your pension provider's website.
Your provider should send you a "wake up pack" four to six months before your selected retirement age. If you do not have any information at all about your pension, visit www.gov.uk/find-lost-pension.
Step 2. Are there any terms and conditions attached to your pension?
Some pensions will have special conditions attached, such as penalties for drawing your pension earlier than planned. Check your original paperwork or contact your pension provider for information.
Step 3. How much state pension will you receive?
State pensions vary, depending on factors such as how many years you have been in employment. You can calculate your state pension by visiting www.gov.uk/calculate-state-pension.
Step 4. Think about your circumstances.
Some people are looking forward to a carefree retirement, while others may still be paying off debts or supporting their children financially. You may also have other income to consider, such as benefits. Also consider possible future needs, such as care costs.
Step 5. How do you want to spend your retirement?
Many people look forward to a change in lifestyle at retirement. Consider the costs of any essentials, such as housing, energy and food, along with leisure time and home improvements. This should help you come up with a realistic sense of what income you need.
Step 6. Bring just the relevant information with you
Pension Wise appointments last 45 minutes so you do not want to spend that time rummaging through 30 years of statements. Bring just what is relevant, for example your most recent statement, giving more time to discuss your options and next steps.