From April 2015, changes in the UK have given the 55s and over the freedom to decide how to access their pension funds if they have a pension based on how much has been paid into their pot such as defined contribution, money purchase or cash balance scheme.
However, with greater freedom comes greater responsibility. Responsibility to make sure you have enough to live on throughout your retirement, and that you can provide for any dependants after you die.
Careful planning based on your financial and personal circumstances is essential to make the most of this new flexibility and avoid costly mistakes, large tax bills or running out of money.
Focus on how much money you have now, any loans or debts, and what income you will need to support the lifestyle you want in retirement. This must include meeting unexpected costs as you grow older, such as long-term care costs. You’ll also need to consider how your choices will affect your tax and your entitlement to benefits – both now and in the future should you need care and support later in life.
Your health and life expectancy – and that of any partner or dependant – will also influence which choices are best for you.
What choices do you have?
Your main options are the following, and I have numbered these under six main areas that should cover all possible ways to manage any desired outcome:
▪ Leave your pension pot untouched: Simply take it later.
▪ Use it to buy a guaranteed income for life: Otherwise commonly referred to as a lifetime annuity. The income is taxable but you can choose to take up to 25% of your pot as a one-off tax-free lump sum at the outset.
▪ Use it to provide a flexible retirement income: Now referred to as a ‘flexi-access drawdown’ or ‘income drawdown’ contract. You can take 25% of your pension pot (or 25% of the amount you allocate for drawdown) as a tax-free lump sum in the UK then use the rest to provide a regular taxable income.
▪ Take small cash sums: Again, the first 25% of each cash withdrawal from your pot will be tax-free. The rest will be taxed based on your country of tax residence and normally at higher marginal rates.
▪ Take your whole pot as cash: Yes, you guessed it, the first 25% will be tax-free and the rest is taxable at your highest rate of tax.
▪ Mix your options: You can also choose any combination of the above, using different parts of your pot or separate pots.
Is it that easy?
It certainly would appear that way but, when scratching below the surface, there are potential long term problems which, if not dealt with at the start, could cause unnecessary stress.
Many have not even considered the tax aspect. The UK 25% tax-free cash element may not be considered tax-free in Portugal but there are very generous allowances when you declare the entire withdrawal that can provide up to 85% as a tax-free or tax-exempt portion.
Bad planning or unsolicited approaches by firms who are neither regulated nor authorised has reminded the industry of huge misselling scandals that ran riot across the UK pensions industry over 10 to 15 years ago.
Make sure that any approach is solicited and, even if it has been instigated by you, make sure that the firm or individual is regulated and authorised to provide UK pension advice. You can check each firm or individual out on the UK FCA Register. If you prefer to manage everything yourself, you can contact Pension Wise which is a free and impartial guidance service set up by the UK government.
The article represents our interpretation of current and proposed legislation and HMRC practice as at the date of the publication. These may change in the future.
By Raoul Ruiz Martinez
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Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000. | 289 561 333
