Pension freedom reforms - essential update

Our blog this week has been written by James Robertson, Chartered Financial Planner with Active Financial Planners based in Stockton-on-Tees. James offers a very helpful update about pension freedom reforms.

Back in April 2015 when pension freedom reforms were introduced, there were predictions that people would use their entire retirement pot and we would have a spate of ‘Lamborghini’ pensioners. We are sure you will remember the headlines. I certainly can!

More than three years on, and in all reality, we can safely say that this has not been the case. Yes, there has been almost £16bn (Source: HMRC) withdrawn from pension pots since 2015 and official statistics do show that average withdrawals (per quarter) are continuing to fall, with the average withdrawal per individual of just £7,596 reported in the last quarter of 2017In contrast though, the industry has seen much more being invested into private pensions arrangements since the changes came into effect, with personal pension contributions hitting a record high in 2016/17 with £24.6bn of contributions paid in (to personal pensions), up from £24.3bn in 2015/16. It is thought that the statistics will show even higher figures for 2017/2018 when released. Our own experience would support that theory.

Here’s a bit more information about the key changes:

1. Pension Freedom

Until April 2015 most people had the ability to access up to 25% of their pension pot tax-free upon retirement. As of 6th April 2015, this changed for those with most of the major “defined contribution” funds. These people will be able to access up to 100% of the cash in their pension pots. But beware, after the first 25%, this drawdown of cash from your pension pot may well be taxable, or crucially, even if it is not taxable, it may be taxed at source, leaving you with the need to reclaim the tax via Self-Assessment.

2. Death benefit taxation

For the over 75s, or for those under the age of 75 who have started to access the cash in their pension pot via drawdown arrangements, lump-sum inheritance upon death was taxable at the astonishing rate of 55%. This has now changed. Whether you have touched your pot or not, if something happens to you before the age of 75, your beneficiaries will inherit your pension fund without any tax liability. Rules have also changed for those over 75, however, this area remains extremely complex and if you are concerned, it may be worth taking advice.

But watch out…

1. Where you have a publicly funded final salary pension pot, these pension freedoms will not apply.
2. For some pension arrangements, in order to take advantage of the new freedom, you will need to transfer the money first to a new policy before you can access the funds.
3. The tax implications of accessing your pension pot are extremely complicated – you could find yourself facing an unexpected tax bill. Even if you aren’t liable for tax on the cash you withdraw from your pension, you might find that without the right planning tax is deducted, and you are forced to claim it back.
4. A decade ago, the maximum you could pay, tax-relievable to pensions, peaked at £255,000, later dropping down to £40,000 in 2014 and is now subject to tapering. The tapered annual allowance targets individuals with a “threshold income” of over £110,000 and an “adjusted income” of over £150,000. This has caught out many doctors and senior civil servants as it means that once earnings hit £210,000, it leaves taxpayers with a maximum tax-relievable amount set at just £10,000.
5. 2019 marks the first year that taxpayers are truly feeling the effects of tapering. Taxpayers have been able to reduce their tax burden by using up their previously unused allowance. This reprieve is now over, which has been causing large tax bills for some. The British Medical Association (BMA) estimates that nearly a third (30%) of consultants have been impacted by tapering over the last two years and predict that figure will rise to 100% of full and part-time consultants at some point during their career.

So, will you spend now or spend later?

Before 2015 the options upon retirement were fairly limited. Now, you can pretty much do whatever you want with the pension pot you have amassed during your working life. That means you really could access the whole pot and take off around the world when you retire. But with new freedoms come new risks. If you access your pension cash now, it will be important to have a good financial plan to ensure your security once the cash runs out. And given how difficult it is to predict the path our lives will take, who knows what your financial needs will be twenty years after retirement?

So, what next?

The one point which everyone agrees on is that the need for good advice in retirement is now greater than ever. So much so that the government’s original commitment to supporting this new legislation with free pensions advice for all which has gradually turned into free pensions guidance through Pension Wise. A skilled pensions adviser or financial planner will be able to work with you to understand the nuances of your financial situation and make recommendations which fit with your goals, risk profile and personal situation. We’d urge everyone, however near or far you are from retirement, to get a plan.

Alongside the introduction of Auto Enrolment, Pensions freedom reforms have given people much more flexibility when it comes to their retirement and family wealth estate planning. Gone are the days when simply ticking an annuity option box from your pension company provider proved to be the best-perceived option.

It does, however, remain very important that you take advice from an independent expert to ensure that any withdrawal you do take from your pension fund has long term sustainability.

This is not a financial promotion. The content of this blog is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.

A pension is a long-term investment, the fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Pension income can also be affected by interest rates at the time benefits are taken. The tax implications of pension withdrawals will be based on an individual’s circumstances, tax legislation and regulation, which are subject to change in the future.

As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax-related issues. If you would like to speak to one of our local experts, please call Martin Johnson on 0191 567 8611 or e-mail m.johnson@uhy-torgersens.com.