Pension Freedoms 2015: Will your clients have enough income in retirement?

New rules which give far greater flexibility over what individuals can do with their ‘pension pot’ came into force on 6th April 2015. Anyone over the age of 55 can now take advantage of the new pension freedoms since the rules came into force.

Have any of your clients taken advantage of this? Or have you had an increase in the number of calls from clients wanting specific advice regarding cashing in their pensions since the ruling?

Recently published data has revealed that of the 232 enquiries received by the Financial Ombudsman Service relating to pension freedoms, half were concerning delays and poor service. Through further analysis of the data, there appears to be two emerging themes: firstly, consumers are frustrated that what they thought would be an easy process to access their money is proving to be anything but and secondly, and more worryingly, is the level of discontent customers feel.

Since the new ruling, financial firms have received around four times their normal volumes of calls and data suggests that among the enquiries received were thousands who simply wanted to know how they could get their hands on their cash. Some providers were reportedly struggling to answer these queries, with call waiting times of up to two hours.

So, how easy is it for people to access their hard earned pension?

Essentially, there are two ways of accessing pension savings (aside from buying an annuity). The first is the Uncrystallised Funds Pension Lump Sum route, more commonly known as UFPLS, and the second is drawdown. However it’s withdrawn out of a pension, the first 25% of any withdrawal is tax free and the remainder is taxed at a marginal tax rate — the highest rate taxable based on current income, which will be either 20%, 40% or 45%.

With UFPLUS, pension funds stay invested in the individual’s pension and they can draw out money directly from this pot as and when they wish. It works similarly to a bank account, but withdrawal is not that simple and a ‘tax payment’ could be applied each time a withdrawal is made. This option is better suited to those who want to make smaller, regular withdrawals over time rather than taking 25% of their entire pot in one go. For each withdrawal made, as mentioned, 25% is not taxed and the rest is taxed at the applicable marginal rate. One thing to consider when using this method is that once withdrawals are made using UFPLUS, the amount allowed to be paid into a pension each year drops from £40,000 to £10,000.

Next, there is the flexi-access drawdown option which requires all of the retirement fund from a pension pot to be put into a drawdown arrangement, either with the current provider or an alternative. This is a new version of what was previously known as ‘flexible drawdown’. Previously, savers had to have another pension income of at least £12,000 a year to qualify, which is why it tended to be used only by the wealthy. This rule has now been abolished.

Under flexi-access drawdown, up to 25% can be taken of the entire pot, tax-free in one lump sum upfront with the rest being left as investment. A regular income can then be taken from the invested money if desired, which will be taxed at the individual PAYE rate. It can also be left invested until a later date. And, unlike with UFPLUS, up to £40,000 can continue to be paid into the pension each year.

Most providers won’t charge to withdraw money, but there are exceptions. Royal London, for example, will charge a one-off £184 to withdraw under flexi-access drawdown, while those with Axa’s Retirement Wealth Account pension, a standalone self-invested personal pension (SIPP), will pay at least £150 per transaction to withdraw their money via UFPLUS or drawdown. Do you think these charges are fair?

Which of the above examples do you feel is the best way to save and withdraw from a pension fund?

Please let us know your views on this subject by leaving a comment below.

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