Pension Freedoms April 2015 – A Life Planner’s Perspective
As Life Planners we are forever delivering clients to financial freedom, so what do the new pension freedoms mean to us?
Pension Age 55 increases to 57 from 2028
As State Pension Age shifts to 67, the minimum age at which you can access pension funds will become 10 years less. Anyone born after March 1973 is affected. This means that people will have to wait longer in order to access their life savings to pursue their dreams, such as pursing an entrepreneurial calling. Always check out your heart-felt goals before locking away funds in pensions.
Flexible Access Drawdown (FAD) – Money Purchase only
Changes to Money Purchase schemes will, scheme rules permitting, allow the member to take the whole fund in cash in one go. The money so taken is called Uncrystallised Funds Pension Lump Sum (UFPLS). The first 25% taken is tax-free, the rest is taxed at your marginal rate. The Pensions Minister Steve Webb said: “If people do buy a Lamborghini but know that they’ll end up just living on the state pension, that becomes their choice.” From our perspective this measure removes barriers to the fulfilment of heart-felt goals, which are seldom about the money but require money to bring them into being. There is the risk that funds will be depleted in the pursuit of mind-thought goals, satisfying the ego without delivering lasting contentment.
Defined Benefit/ Final Salary Lock-In
There is a new requirement that members of final salary pensions will have to seek the advice of a FCA regulated financial adviser if they want to switch pension rights to money purchase in order to access FAD freedoms. However, very few advisers in the land will recommend a switch (as transfer values are woefully short of the values required to purchase equivalent benefits) and are unlikely to allow the client to switch on an insistent customer basis. Advisers will still charge a few thousand ponds to produce a report, but the member is effectively locked into the DB scheme. Members of unfunded public sector schemes don’t get the choice, they are automatically locked in.
FAD impact on contributions
On exercise of FAD freedoms the amount you can pay into your pensions in the future will be restricted. The Money Purchase Annual Allowance falls from £40,000 to £10,000 per year, and you will be unable to carry forward any unused relief from previous years in order to top up this amount. So exercising your freedom burns bridges in terms of the prospect of making future pension contributions is concerned.
The inheritable pension
On death your unused drawdown fund can be passed on to anyone, and they can either leave the money invested in the pension or take it as cash. Before you decide to leave your pension as part of your succession planning, there is a catch. Whilst on death before age 75, the benefits are payable tax free to beneficiaries designated within two years; on death after age 75 the benefits are taxed at the recipient’s marginal rate. You could be risking significant tax penalties from not using your pension to live the life you love in active retirement, tax on your nominee and/or their successor’s flexi-access drawdown fund.
State Pension Impacts
Something not often mentioned on guidance sites is the impact all of this could have on your State Pension entitlement. New changes coming in in April 2016 to State Pension benefits could leave you with a flat rate pension entitlement of £148.40 per week (to be confirmed Autumn 2015). The amount you receive depends on your National Insurance Contribution history. If you should decide to take FAD benefits and stop working you could lose valuable State Pension entitlements of one-thirty-fifth of the flat rate for every year, plus accrued Additional State Pension could be eroded. The current BR19 Forecast service has not been updated with the new terms, so you will not be able to calculate your State Pension entitlements.
Free impartial guidance on pension options is available on Pensionwise, and you will be sign-posted to this service.