With the introduction of Pension Freedom reforms this April which allows you to draw down sizeable amounts of cash from your pension pot, the Financial Conduct Authority (FCA) has put in place new rules for financial administrators to follow.
What is Pension Freedom?
Under Pension Freedom you will be able to take advantage of unfettered access to your pension pot, providing you are over 55 and you have a defined contribution pension scheme, or a money purchase pension scheme. This means that unlike the current system where you have to buy an annuity to provide an income until you die, from April this no longer applies.
Instead, you will have access to invest-and-drawdown schemes which at the moment are limited to wealthier pension pots. Under invest-and-drawdown you can make as many withdraws from your pension pot that you want. Each 25% of the withdraw will be tax free, with the remaining 75% taxed as income.
The 55% death tax on pension pots invested will be axed.
Although this sounds exciting on paper, the FCA has concerns over the reforms.
- Fearful that people who have never had much experience of calculating their own tax will be hit with sudden, unexpected tax bills.
- People will be open to fraud, or will be buying pensions which underperform compared to other pensions on the market.
As such the FCA has rushed through a series of checks. According to the website thisismoney.co.uk, the checks were drawn up by the FCA without consulting the financial companies that will be administrating most of the pension schemes eligible for Pension Freedom.
In a statement the FCA said: “Providers will be required to give relevant risk warnings, such as warning of the tax implications of their decisions, in response to answers from consumers.
“The decisions consumers make about what to do with their pension pot are important and in some instances these choices are irreversible. We want to make sure that people have the help they need to make those choices.”
FCA Rules for Pension Freedom
The FCA wants pension providers to direct clients to the Pension Wise guidance scheme. This is a scheme designed by the Government to answer questions you may have. Companies that are administrating Pension Freedom, will also have to ask you about your lifestyle, and give you the full picture on how much tax you may have to pay with each withdraw from your pension pot.
Tax and Pension Reforms
The main concern the FCA has expressed is over tax. Arguably, the main aspect to be aware of is that if the amount you draw down exceeds the basic rate tax threshold, currently £41,865, you will then be expected to pay tax at 40% rather than 20%. This could be a shock if you are not expecting it.
What can I do to Understand Pension Freedom?
The first step is to seek advice. Not just on the tax issues but pensions generally. A concern the FCA has is that many people have opted for schemes which are delivering a poorer pot than what is available on the market.
With this in mind, get in touch and we can go through your current scheme and see where you stand. We can look at the markets and see if a better pension scheme is available for you. We can also go through tax and other implications of the Pension Freedom reforms. Click here and complete the form. I will contact you to make an appointment. It is time to get the full picture.
Source: This is Money