Do you understand your new pension choices?

Thursday 7 April, 2016

Daniel Stansall, independent financial adviser Barnet explains your pension options at retirement

Until recently the choice of what to do with your pension at retirement was fairly straightforward. There were in essence two options, with a lot of individuals being limited to just the first of these:

Option 1 -  Buy an annuity and receive a guaranteed income for life. There were various additions that could be included, but in its simplest form you would be securing a known level of income until your death. 

Option 2 - Enter into an income drawdown arrangement. This option was contingent on either:

A.      Having either sufficient other guaranteed income.  For example a final salary pension scheme with full flexibility over how you accessed your pension.  Or

B.      The government limiting how much of your pension you could access in any given year.

No matter which option you took, (or a combination of both) you would end up with a known income in retirement. This greatly reduced the need for financial planning in the later stages of life, as a lot of savers would set up a ‘one and done’ policy and then live out their retirement. 

How has the pension landscape changed?

Now however, following the recent changes to how pension benefits can be taken, the pension landscape has changed dramatically. 

• Anyone can access their pension pot, via flexible drawdown.  Pensions have become more like a regular bank account, as you have flexibility in the amount of income you draw at one time.
• Pensions are also now incredibly efficient ways of passing money down to your beneficiaries without incurring inheritance tax charges. 

If you couple these changes with the decline of final salary pension schemes, and the reduction in annuity rates, leading to a reluctance by many to purchase an annuity you realise that most people will need to exercise far greater consideration when drawing on their pension. 

Annuity choices

There is still the choice of purchasing an annuity, and this will remain a valid choice for a percentage of people. But you might not want to lock into an annuity for life, or you might want to maximise how much money you leave behind to your beneficiaries, in which case you may well want to consider income drawdown. If you are lucky enough to have other pots of money; ISAs, investment bonds, cash savings, or perhaps you have downsized your home, these new pension freedoms will allow even more flexibility and greater opportunities for tax-efficient planning.  

Even if you only have one pension, or a variety of different investments, you will want your investments to provide that income in a way that minimises how much tax you pay. You also need to understand how much income you can safely draw from your investments without running the risk of extinguishing your funds. 

Daniel Stansall, Lonsdale Services independent financial adviser Barnet said:

'With a bit of thought and a firm understanding of the basic principles, it is possible to structure your finances in a way that both maximises the income you have in retirement as well as providing for your beneficiaries. You can of course do this yourself, but if you find all of the permutations confusing you may wish to speak to an Independent Financial Adviser who can help you understand how best to achieve your financial goals.' 

Daniel Stansall is a qualified Independent Financial Adviser, based at the Lonsdale Services Barnet Office. Daniel has also passed the Chartered Institute of Insurance (RO8) Pension Update examination.  For more information about the retirement services offered by Lonsdale Services please refer to the pension information on our website.

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