£19m has been released each day since the launch of Pension Freedoms.

In his 2015 Spring Budget, then-chancellor George Osborne introduced sweeping changes to the way that pensions are taxed. The new pension freedom rules have led to the over-55s being faced with a variety of different choices when taking and investing their nest eggs.

Prior to April 2015, when most people with a defined contribution pension reached retirement age, the only option available was to buy an annuity, which involved using pension savings to purchase a guaranteed income for life.

This articles covers the following:

  1. People Retiring Each Year
  2. Peak Pension Freedoms
  3. Pensions Freedom Options
  4. Be Aware Of Scammers
  5. Don’t Overlook The Tax

People Retiring Each Year

Roll on five years, it now means anyone aged 55 and over can take the entire amount of their defined contribution pension scheme as a lump sum, paying no tax on the first 25%, with the remaining taxed as if it were a salary at their Income Tax rate.

Before this, tax restrictions ensured that many of the people retiring each year were required to purchase an annuity – a product provided by insurers which turns a pension pot into a secure retirement income for life. The problem with some annuities is that they have become poor value, particularly for savers who bought the wrong kind.

Pension Freedoms - Retired Couple out Cycling

“it is worrying that 94% of adults are flying solo, not seeking any financial advice each year”

Peak Pension Freedoms

Official figures published show that £32.97 billion of taxable payments have been taken from pensions since freedom and choice were introduced. This equates to an average of £18.75 million being flexibly withdrawn every day over the past 1,760 days since pension freedoms were introduced.

In the coming decade, a record 9 million people are set to enter the arena of the pension freedoms at age 55. This is more than is expected to be seen in any decade that follows, with the 2020’s likely to see peak pension freedoms.

Increased Responsibility

With the popularity of pension freedoms continuing to grow and savers being entrusted with increased individual responsibility, it is worrying that 94% of adults are flying solo, not seeking any financial advice each year.

The Money and Pensions Service (MaPS) has launched its strategy with a vision of ‘everyone making the most of their money and pensions’.

Take Your Time And Seek Advice

If you are considering your pension freedom options, the future has ‘got a lot more interesting’.

Remember: take your time and seek professional financial advice. The pension freedoms are available from age 55, but there is no need to act at age 55. And your time in retirement may be longer than ever before.

Pension Freedom Options

There are a number of different options when you are deciding how to take your defined contribution pension pot:

pension freedoms - options

Leave Your Whole Pot Untouched

You don’t have to start taking money from your pension pot when you reach your ‘selected retirement age’. You can leave your money invested in your pot until you need it.

Guaranteed Income (Annuity)

You use your pot to purchase an insurance policy that guarantees you an income for the rest of your life – no matter how long you live.

Adjustable Income

Your pot is invested to give you a regular income. You decide how much to take out and when, and how long you want it to last.

Take Cash Lump Sums

You can take smaller sums of money from your pot until you run out. Your 25% tax-free amount isn’t paid in one lump sum – you get it over time.

Take Your Entire Pot In One Go

You can cash in your entire pot – 25% is tax-free, the rest is taxable.

Combine Your Options

You can also combine different options. However, to do this, you would usually need a bigger pot.

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Be Aware Of The Scammers!

Make sure you don’t fall victim to scammers.

Your pension is likely to represent the biggest single source of your private wealth, so the attraction for scammers is obvious. Cashing in all or part of your pension before you’re 55 is unlikely to be in your best interest.

Since January 2019, it has been illegal for anyone to make unexpected cold calls, emails or text messages offering a free Pension Review.

See the Financial Conduct Authority’s ScamSmart website for more advice.

Don’t Overlook The Tax

Think about the matter of tax.

How will taking advantage of pensions freedoms affect your particular situation?

The way in which you access your pension savings can have a significant impact on how much tax you may need to pay and therefore on the income your receive in your retirement.  It’s important to fully understand the implications BEFORE you cash in any of your pensions funds.

Professional Financial Advice

Finally, don’t underestimate the importance of obtaining professional financial advice.

You may have been saving for 30 years, so take more than 30 minutes when considering your options.

A Long Life Needs A Smart Plan

The way you take your money for retirement will have a big impact on how long it will last, and how much tax you pay. To discuss pension freedoms contact Tony Thomas on 07585 592494, email: tony@wealthmasters.co.uk or use the button below to arrange a meeting.

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