For years pensions and annuities were just plain boring. The money invested in a pension was out of reach until you reached retirement age, when you would be railroaded into an annuity paying as little as the pension industry could get away with.
From April 6 that all changes. Not only is the pensions industry getting ready to sell us products we did not know we needed, but the scammers and the con artists are out in force and the tax man is also liable to benefit – unless we keep our wits about us.
From April 2015 the rules on getting hold of your pension pot change. There is a revolution coming that changes the way we think and deal with both pensions and annuities. Many of us will be able to get our hands on all our pension cash in one go. And that means three ways we could get clobbered.
1. Tax
But if you take the whole lot in one go the Chancellor and HM Revenue & Customs (HMRC) could be the real beneficiaries because of the way the taxed and tax free components work. You can take up to 25% of your pension as tax free lump sum but you pay tax at your highest rate on the rest of it. You don’t have to take it all in one go and it may make sense to phase how you do this depending on what other income you have in a given tax year. To work this out follow the guidance on the governments Pension Wise website
2. The ‘true cost’
Pension companies will be contacting us and encouraging us to stick with them and be offering a range of one stop products that we can just whack all the dosh into. They will also be charging us when we do want to take our money away from them and put it somewhere else. All manner of scammers and fraudsters are setting up schemes and bogus websites to help them liberate our pension pots. Avoid them all. In fact, avoid anyone trying to sell you something. Plus, a whole new market is going to open up in second hand annuities, as the government has decided that people who have already bought annuities can benefit from the new scheme from 2016 and sell them on in order to get their hands on the cash.
3. Security
If you have several well funded pensions then liberating one of them may be, well, liberating. But what if you liberate a nice lump sum, spend it and then a few years later need help adapting your home because you’re getting on a bit? How you think and act will be critical in terms of your future security.
So, here’s our top tip…
Wait. There’s no rush.
- There ‘s no cut off for when you can get your money out and it is likely to be chaos in the early days and weeks as the new rules are tried, tested (and abused by less scrupulous purveyors of financial products and services).
- A typical 55 year old should live for another 25 years. You need to work out what other income you will have and take time to weigh the implications.
- Liberating your boring pension pot may make sense but you need to do the maths and get the best possible advice.
- You can get a free 45 minutes session with the government’s Pension Wise people (easier once the rush has died down) but you may well need more impartial advice than that. Plus, the advice is liable to get better as the service gains practical experience.
- We’ve launched a pension planning hub to help you and alert you to scams and problems. We’ll be building the information and alerts it contains as the weeks pass. You can find it here