Advice is key
Posted on Nov 14, 2018
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The latest figures from HMRC reveal that since the pension freedoms were introduced three and a half years ago, nearly £22 billion has been withdrawn from pension plans.
Figures show that 258,000 savers flexibly withdrew just under £2.2 billion from their pensions in the third quarter of this year – slightly down on from the £2.3 billion taken out in the second quarter.
Since April 2015, anyone aged 55 or over has been able to take the whole amount from their personal pension as a lump sum, generally paying no tax on the first 25% and the rest taxed at their marginal income tax rate.
The Government hailed this move as giving us ‘freedom and choice in pensions’. While many predicted that there would be a rush to cash in pensions and spend the cash, although there was an initial flurry, people do seem to have been, on the whole, reasonably sensible.
In simple terms, ‘pension freedoms’ means benefits may be drawn from pension plans at any time after age 55 and you don’t have to retire from work in order to draw benefits. The two main methods of drawing benefits from accumulated pension funds are an annuity purchase or a flexi-access/income drawdown.
While there is a certain temptation in seeing cash ‘sitting’ there, many DIY investors don’t realise that, having taken their new flexi-access drawdown and invested into cash, charges and inflation will erode the pension plan’s real value. People also often overlook the fact that the flexi-access drawdown provider has to deduct emergency income tax unless a tax coding is provided. This means that many people receive far less money than they expected, pay unnecessary income tax due to a lack of tax knowledge and don’t reclaim any overpaid tax…
We’ve seen frequent stories in the media about people who have been tempted by ‘get rich quick’ schemes with, sometimes, disastrous consequences. A lack of investment strategy and investment diversification knowledge can lead to wholly unsuitable portfolios…
On top of this, while people may enjoy the benefits of receiving a lump sum, the chances are that they won’t have sat down and considered how they are going to fund their retirement years. This is when good financial advice, coupled with an understanding of the tax system, is key. For instance, clients can often minimise income tax payments by taking taxable benefits across two tax years.
Other people consider that they are taking the more sensible approach of opting for annuity purchase. There are many options and variations available, including underwritten (ill-health) annuities, but research shows too many people convert to an annuity for life with their original pension plan provider – this is often not the best choice as better annuity rates could be available elsewhere.
At The Goodman Partnership, we have built our reputation on advising people at or near retirement helping clients to weigh up their options and make the best decisions for their future. Click here to find out more or call us on: 01892 500600.