Top 5 things to think about for Pensions Freedom Day
As many people celebrate the close of a short week and the start of a long weekend, don’t forget that Easter Sunday also sees the end of the 2015/16 tax year, meaning if you haven’t topped up your ISA for this year, you might be too late now. But what it also means is that Easter Monday, 6 April, is Pensions Freedom Day, a day when, if pensions minister Steve Webb is to be believed, millions of over-55s won’t actually blow their retirement savings on a Lamborghini- although they could. But with so many people suddenly gaining full and unfettered access to a pot of money, what are the top five things to think about if you have qualified for parole from your pension?
1. Pensions Freedom Day is actually a bank holiday
This means that, in all likelihood, you won’t actually be able to do anything anyway, even if you wanted to drive off into the sunset in your shiny new sportscar. However, on Tuesday 7th, expect lengthy queues to get through to your pension provider as folks rush to get their mitts on their cash.
In fact, if you don’t need all that money desperately, why not wait a while. Just because you can access 100% of your pension fund should you so wish on Monday (Tuesday) doesn’t mean you have to. Why not sit back and watch those first out of the gates be hit by errors and mistakes while everyone gets their systems sorted?
2. Remember there are tax consequences
While you will have theoretical access to 100% of your pension fund if you are 55 or over on Monday, don’t forget that there are tax consequences, so grabbing it all out at once might not be the most prudent move. While 25% of the value of the fund can be withdrawn tax free, any excess over this amount will suffer income tax charges, and if you take it all out at once you could end up paying higher rates of tax than if you spread your withdrawals over a number of years.
3. But watch out for charges
Industry watchdogs are already squaring up for a fight, as this new regime opens the door for pensions providers to levy whatever extortionate charges they choose, particularly for those who want to access their pension fund in the most flexible manner. Make sure you know the financial implications of each withdrawal- and particularly watch out for fixed charges- a £200 fee is only 1% of a £20,000 withdrawal, but 10% of a £2,000 one.
4. Don’t spend it all at once
While it could be very tempting to go and blow it all, try to factor in how long you are likely to live and how much you are going to need to cover that expectation. And bear in mind that, according to the Telegraph most people underestimate their ‘official’ life expectancy by around four years.
The wisest thing to do would be to just draw the income, and preserve the capital (which generates that income) but most people’s pot won’t necessarily provide enough income, resulting in an erosion of capital. Just try not to wipe out your income- earning capacity too quickly, as it becomes a vicious circle.
5. Think about an annuity…
While this might sound counter-intuitive, just because you no longer have to take an annuity doesn’t mean that it mightn’t actually be the best investment option for your pension pot. As with everything else in life, there are pros and cons of annuities, but don’t discount them out of hand before working out if that would give you financial security in your retirement.
Happy Easter Pension Freedom Day.