We are entering a whole new world for pensions – making them more attractive and flexible than ever before.
by Dr. Ros Altmann
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The contributions you put into a pension fund will continue to benefit from the traditional generous tax relief– particularly beneficial if you pay higher rate tax – and all investment returns are tax free. That’s not new. But what is so exciting is that you will be able to choose what you want to do with your fund. The old rules which forced most people to buy expensive or irreversible products are being ripped up and you will be free to do what is best for your own circumstances after age 55.
With interest rates having fallen so sharply in recent years, annuities offered much less pension for your money and, once bought, you were usually stuck with your annuity for life. In future, you won’t have to annuitise unless you choose to.
If you were one of the wealthiest pension savers you already had this kind of freedom – you weren’t forced to annuitise and could use drawdown funds, or leave your money invested, or even move it offshore and escape tax, but most people had no choice and were forced to buy annuities. The new rules offer similar freedoms to everyone, whether their pension savings are large or small. The money you withdraw (apart from the 25% tax free lump sum) will be taxed as income each year. You do need to be aware of the tax consequences of taking money out, so you don’t inadvertently fall into a tax trap.
This pensions revolution opens up more options for you, so the Government has established the free ‘Pension Wise’ guidance service to help you make the right choices – you would probably benefit from paying for expert independent advice as well.
The new rules should allow you to take money out as and when you need it, however not all pension companies will allow you to, so check with your provider. You may have to move to another pension company to benefit from the new freedoms.
It is good news that everyone will be treated as responsible adults – no nanny-state dictating what you must do with your hard-earned pension savings. That makes pensions a much more attractive proposition.
And there is even more good news. The new rules make pensions efficient for inheritance tax planning, although you should really get advice. Under the old system, any money left in your fund when you died was taxed at 55%. That meant you wanted to minimise the money in your fund as you reached older ages. But that draconian death tax has been abolished and in future the money in your pension fund can pass on tax-free – no income tax, no inheritance tax – as a pension for your loved ones. So you can think of passing pensions down the generations – and you must tell your pension provider who should inherit your pension fund. Keeping money in your pension for longer makes sense and it could help you fund long-term care if the need arises, which was not possible with annuities.
That’s all great for pension savers in the future, but what if you are one of those stuck with annuities you never really wanted to buy, or that don’t suit your needs? It’s a shame there was no Pension Wise service in the past. Indeed, even though annuities were irreversible, there was no proper consumer protection,. Companies just offered you their standard ‘one-size-fits-all’ annuity without any risk warnings or suitability checks.
The financial services Regulator (FCA) is investigating the past selling of annuities which could lead to redress. But even without actual mis-selling, many customers feel aggrieved at being forced to lock their pension fund into an annuity that is unsuitable for them, while others are free to choose. Therefore, I welcome the government’s plans to try to establish a second-hand market for unwanted annuities.
It is only fair to give everyone the chance to participate in this brave new world of pension freedom and choice.