Skerrits, in advance of two free seminars they are hosting at the Amex in March, asks if pensions have suddenly become sexy?
“This government believes in the principle of freedom. Individuals who have worked hard and saved responsibly throughout their adult life should be trusted to make their own decisions with their pension savings” – George Osborne, Chancellor of the Exchequer
Pensions have traditionally been seen as necessary but, let’s face it, a bit boring and often perceived as restrictive, poor value and poor performing. What pensions needed, was a bit of a make-over.
To be fair, even as pension’s advisers, we did not see it coming when George Osborne announced the biggest changes to pensions in our lifetimes. It took a few reads to appreciate just how radical the changes were.
Initial reaction to the changes was mixed. Some saw it as the dawn of an exciting new era and others thought it was irresponsible, electioneering and dangerous.
We believe it is fantastic news for anyone that has a pension and anyone wanting to invest into one. Yes, some people may be tempted to take all of their pension pot at once, but we think it will be a small minority and will tend to be from small pension funds. Talk of buying Lamborghinis is wide of the mark in our opinion.
The most fundamental change is that the over 55s, will be able to take their entire fund as a lump sum if they wish. There will be no limit on the amount they can take at any one time (unlike the current rules where there is a maximum limit).
Whilst this freedom may sound appealing, there are a several reasons why this is probably not a good idea for most:
Whilst 25% of the fund is tax-free, the other 75% is taxable at your marginal rate. This means that it is added to other income and taxed in the same way as a salary. Some will have a nasty shock when they find themselves paying higher rate tax on the withdrawal at 40% or even 45% for larger funds.
Taking out a large chunk could mean there will be less to provide a future pension income, and potentially an impoverished old age.
Taking money out of a pension fund and investing elsewhere is likely to mean moving it from the tax efficient environment of a pension fund to an investment where growth may be taxed.
Money in a pension can be passed on free of inheritance tax.
Taking your pension fund may affect any State Benefits
Whilst many welcome the chance to take higher income or take out lump sums it is something that should only be done after careful consideration, and sound advice. The Government has set up PensionWise to offer a free guidance service, although this will not be a substitute for taking proper financial advice from a qualified adviser.
Pensions as an Inheritance
The new rules have also opened up new opportunities for people to pass on pension funds to their families, with much more favourable tax consequences.
From April, when someone dies before age 75 their chosen beneficiaries will be able to take income or lump sums from the pension completely free of tax. On death after 75 income taken will be taxed as income based on the recipients’ tax status. And if the beneficiaries don’t fully use the pension funds, they in turn can pass them down to their children or grandchildren.
A Time to Invest
These changes give plenty of flexibility and choice and this can only be a good thing in terms of encouraging people to invest in pensions – feeling their money was tied up has been a major factor in stopping people investing for retirement.
Knowing they can take what they want, when they want (and if they die that their families will get the full benefit) is encouraging many to reconsider. The existing tax reliefs for contributions remain. For every £80 a basic rate tax payer puts in, it is topped up to £100 by the Government. Higher rate tax payers can get 40% relief.
Naturally the Government do not want the new freedoms to be seen as a tax avoidance strategy for the wealthy and controls are in place to restrict abuse. From April, the annual savings limit of £40,000 will reduce to £10,000pa for anyone who starts taking income from their pensions, restricting the opportunities for high earners to get full tax relief on large contributions and then get 25% out tax free.
We believe there has never been a better time to invest in pensions. Quite apart from the new pension rules, there have been major advances and innovations in pensions in recent years. They have moved on from the dark days of hidden charges and poor fund ranges. Modern pensions offer access to a full spectrum of investment opportunities, full online functionality and active investment management to help people get the most from their retirement pots.
Have pensions become sexy? I think they probably have….
Skerritts are hosting two FREE seminars at the Amex Stadium on March 19.
For more information, call 01273 204999 or email email@example.com