In 2015 the Freedom and Choice in pensions legislation introduced greater flexibility about how you can take the benefits from your pension fund.
These changes apply to pension funds which have a fund value – known as defined contribution or money purchase plans. However the new Freedom and Choice options are not automatically available to all pension plans – so you may have to move your fund if you wish to access greater flexibility.
A reminder of the changes
Before April 2015, after taking any tax free cash up to the maximum of 25% of the fund, for most people the traditional route was to use your retirement fund to provide a guaranteed regular income for life in the form of an annuity. But the changes now offer more options, allowing you to take income or lump sums from your retirement fund when you want, giving greater client responsibility.
What options are available?
The flexible choices available reflect that retirement today is very different to what it used to be. Many of us may choose to gradually retire rather than taking benefits at one time.
- You can still take up to 25% of your retirement fund tax free, but for the remaining fund you can choose: An annuity – which provides a guaranteed income for life. You can choose for your payments to increase, but that will mean you start at a lower income level.
- Flexible drawdown – which allows you to take variable income to suit your own needs, but the remaining fund is invested so the income is not guaranteed and the value of your investment can fall as well as rise. You can review your income levels and stop, reduce or increase your level of income – but you should consider whether the fund will be able to provide the income you need throughout your retirement.
To take a cash lump sum – You can take lump sums from your fund when you need them. You can also choose a combination of these options, so you could opt to have some guaranteed income from an annuity and use the remainder of your fund more flexibly. Any income taken from the retirement fund will be subject to Income Tax at your marginal rate.
You should also consider other income sources you may have in retirement. For example, do you receive a regular income from your savings or investments, any company pension plans which may provide benefits when you reach the scheme retirement age and State pension benefits. Careful planning of retirement income can reduce your tax bill, allowing you to make more efficient use of your portfolio.
What have people done since Freedom and Choice was introduced?
After the introduction of Pension Freedom, many people have used the additional flexibility. A recent report by the Financial Conduct Authority for retirement benefits between October 2016 and March 2017 showed:
- a drop of 8% in the number of people accessing pension pots
- annuity purchases down 21%
- a 4% increase in starting drawdown policies
- a large increase in taking lump sums.
The report also highlighted that many clients with smaller pots, of less than £30,000, were taking the fund in full. For pot sizes of over £250,000, drawdown became more popular with 81% using this option. Annuities tended to be most popular for mid-sized pots, with 20% using an annuity for pots of £30,000 to £99,000.
Making the right choices
There are many options available and your own situation, risk outlook and personal circumstances will determine what option is best for you. You should also consider tax efficiency for your income and withdrawals. Ask your Origen Consultant to help you to review the options available to you and to identify how you can get the best outcome to meet your retirement income needs.
Take a look at our guide ‘The Origen Guide to Retirement Options’ which provides you with more information about these options.
This article is for information only and is not to be taken as Financial Advice – CA1583 Exp 09/18