5 Tips to Navigate the Pensions Maze

Direction imageIt is important that anyone approaching retirement takes time to get all the help they need, rather than rushing headlong into cashing in their pension, which may be a temptation for many following the new regime.

To help navigate the pensions maze here are 5 points that you might find helpful.

  • Tax needs to be considered

Withdrawals of income on top of any tax-free cash will be subject to tax at a taxpayer’s marginal rate.

Remember also that you will compromise the ability to make further contributions into a pension plan if withdrawing income beyond tax-free cash – as the Annual Allowance then reduces from £40,000 to £4,000.

Smaller pension pots work differently; and it may be possible to cash in a maximum of three pots each worth less than £10,000, without triggering the reduction in the Annual Allowance. However, you would pay tax on the money cashed in after the 25 per cent tax-free cash.

  • You can still buy an annuity

Nothing under the new regime stops you from turning your pension into a lifetime income by buying an annuity, unless you have a defined benefit plan.

The assurance of a regular income will bring peace of mind and financial certainty for many – and for those in impaired health, an annuity may make sense as they will be able to secure more income because of their (potential) shorter life expectancy.

  • Opportunities in inheritance

The new rules allow pensions to cascade down the generations without the tax charges previously known.

For example, if someone dies before age 75, new rules will allow a nominated individual, typically husband or wife, to inherit the pension pot. They can then dip into it at any age, drawing as much or as little as they choose, tax free.

If someone dies after 75, the pot is taxed as income in the hands of the nominated beneficiary. Once a beneficiary inherits a pot, they can put a nomination in place. This allows the value to cascade down the generations inside the tax wrapper.

  • SIPP’s are freedom friendly

Self Invested Personal Pensions (SIPPS) are considered the best option to give you control over your pension during the pre-retirement phase, although they are not suitable for everyone. You determine how contributions are invested and when you take income post age 55.

Any plans that you transfer in (either to a SIPP or otherwise) should primarily be those run on a defined contribution or money purchase basis– and it’s important to make sure the old plans you transfer do not provide invaluable retirement options such as the right to a guaranteed annuity.

  • Help is available

If seriously considering options with your pension savings, start by speaking to your Chartered Financial Planner who will be able to give you specialist and tailored advice and support.

Also, the Government’s guidance service ‘Pension Wise’ may be a useful reference point if you want to get to grips with the different options for accessing a pension and understand more about scams and big tax bills.

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