5 Aspects you need to know now Pension Freedom has arrived
There was a lot of hype around Pension Freedom since the Chancellor of the Exchequer spoke about it in last year’s Autumn Statement. This fuelled rumours and speculation in the financial industry and press. Now it is finally here, what exactly do you need to know? This post clarifies the facts of Pension Freedom.
You have Complete Control over your Pension if you are 55+
If you have a defined contribution pension scheme or equivalent, as of Pension Freedom day you have now complete control over it. You no longer need to buy an annuity, so effectively the pot is yours to spend as you see fit.
It is worth bearing in mind that an annuity is still the only way to guarantee an income for the rest of your life.
You can Withdraw your Entire Pension Pot in one Go
Speak to any financial adviser and they will suggest that you do not draw down your pension pot in one go. The tax implications could catch you out and be cruel. Nonetheless, if you wanted to you can. Here is some handy tax information to bear in mind:
- The first 25% of a withdraw is tax free
- The rest is counted as income. As such if you draw down amount exceeds £10,600 (your personal allowance) after the 25% tax free amount has been deducted, you will pay tax at 20%.
- Should your income exceed £31,786, your tax rate rises to 40%.
- Income rises beyond £150,000, and you pay tax at 45%.
- Remember income is all of your incomes added together and not just your pension.
Watch out for Pension Freedom Scams
Pension Freedom has been well received by the public as it gives you control over your pension and it doesn’t tie you to an annuity. The downside is that scams are expected to rise. There will no doubt be a plethora of cold calling, phone and email spamming, and even door stepping by companies all claiming they can reinvest your pension and make your money go stratospheric. As such, there has never been a time where sound financial advice is needed.
It is best to deal only with trusted financial advisers and call the government helpline if you have any doubts about an investment offer you have received. If it sounds too good be true, it probably is.
No doubt a popular feature of Pension Freedom will be income drawdown. Here you can withdraw a regular income from your pot leaving the rest invested. This option is open to you providing you have £12,000 or more in your pot. The maximum amount you can take is 150% of an equivalent annuity.
Another form of income drawdown is ‘Uncrystallised fund Pension Lump Sums’ (UFPLS). Here you receive regular payments from your fund. In essence you use it like you would a bank account with the first 25% of any withdraw being tax free.
Tax rules apply as above for both forms of draw downs.
As well as Pension Wise, the government’s free impartial advice service, your best option would be to contact a trusted financial adviser who can look at all of your incomes and advise on matters such as your goals, and the dreaded tax that will no doubt catch people out.
Pension Freedom is freedom from the chains of annuity, but it is freedom at a price. Do not be shackled. Contact me and complete the Call Back Service form and enjoy your new found freedom.
Source: Money Facts