A guide to the pension changes

Transcription

1 A guide to the pension changes

2 1 in 5 consumers said they are more confused about their retirement options after the 2014 budget than before. (Unbiased April 2014) 2 /

3 It s a retirement revolution! Let us guide you through it 6 April 2015 saw the most radical changes to private pensions for a generation. The way you can spend your retirement income is now much more flexible. If you re over 55, rather than having to buy an annuity, you can now take as much or as little of your fund as you want, or even take the whole amount as a lump sum. This is great news. Improvements in health mean we re all living a lot longer today s 65-year-old has a good chance of living another 25 years. So the need for more flexibility around pensions has never been greater not only to help make sure you have enough money, but enough at the right time to enjoy your retirement to the full. However, more choice can sometimes mean more complexity. Even the most financially savvy might need help from an adviser who can explain the various options and discuss what s right for them. That s why we ve put this booklet together. It s designed to go with the information your adviser gives you. We hope it helps to make sense of all the pension changes, and helps you make the most of the new flexibility. / 3

4 Where did these pension changes come from? In his 2014 budget chancellor George Osborne announced that from April 2015 people age 55 and over could take as much of their retirement income as they wanted, whenever they wanted, with no limits. He emphasised people no longer needed to buy an annuity. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity. What were the changes? There are now three ways you can access your retirement income: 1 You can still buy an annuity if you want to. This will give you a regular guaranteed income that will be paid out to you as long as you live. 2 You can take out flexi-access drawdown (Fad). Fad enables you to take lump sums and regular withdrawals as and when it suits you. 25% of each amount you move into Fad can be paid out tax free; any income you take from the rest will be taxed. 3 Some providers offer an option to cash in part or all of your pension using an uncrystallised funds pension lump sum (UFPLS). 25% of this payment will be tax free, but the remainder will be taxed as income. 4 /

5 You can withdraw your Nucleus pension fund using flexi-access drawdown or buy an annuity. So I could cash in the whole of my pension? In theory yes, but you will pay tax on 75% of it. When added to any earned income you have for that tax year, this may push you up into a higher tax bracket for example paying 40% or 45% tax. You may also find that you lose some of your personal allowance if your total income, including the pension lump sum, is above 100,000. We ve put together an example over the page to show you how much tax you could pay if you took all of your pension in one go. It s best before you make any decisions to check with your adviser first. / 5

6 Example Heather Heather is 57 and works for a firm of local estate agents. She earns 27,000 a year. Heather has a personal pension worth 48,000 that she would like to cash in. She will take 25% of this pension as tax-free cash leaving a residual fund of 36,000. If she takes the whole residual fund in 2015/16 adding this to her earned income will push her up into the 40% taxpayer bracket. She will then have to pay an additional 11,323 in tax an effective tax rate of 31% on the pension. However, if Heather splits her pension fund over three tax years and takes 12,000 in 2015/16, 2016/17 and 2017/18 she could reduce this. Assuming her salary and the personal tax allowance remain constant she would pay an extra 2,400 tax each year, retain a 20% tax rate, and save 4,123 in tax. Even if Heather needed the money quicker than that and decided to cash in her pension fund over two tax years, she would pay an extra 4,123 in years one and two (an effective tax rate of 23% on the pension), and save 3,077 in tax. 6 /

7 Could I make withdrawals when I choose, a bit like a bank account? Sounds like it, but probably not in practice. Accessing your money can take up to 15 working days as there are steps to follow and forms to complete. With Fad, you could take up to 25% of your pension pot as a tax-free lump sum (if you haven t already done so). You could then make regular withdrawals, but these will be taxed like income. Think about it like this it would be like going to a cash machine and being charged 20% of your withdrawal for example, instead of a fixed fee (or even free). But instead, with your Nucleus pension you can set up a regular stream of withdrawals to suit you for example every month or every year. So, again, it s worth speaking to your adviser to find out what tax you will pay, especially if you are already receiving an earned income. What happens to the rest of the fund? With Fad the remainder of the fund stays invested. You can work with your adviser to decide the best investment strategy for your personal circumstances, including which funds to target for withdrawals. If you invest your pension fund in a Fad, you may also want to consider buying an annuity. With your Nucleus pension you can set up a regular stream of withdrawals to suit you. / 7

8 Why would I want to buy an annuity? For some people, an annuity can seem restrictive. However, they are a good way of making sure your income lasts your lifetime, as they will continue paying out however long you live. However, while annuities offer a riskfree guarantee, you lose flexibility both over the level of income and who may benefit after your death. Using part of your fund to buy an annuity might be one way of making sure your regular income needs can always be met in retirement. You could then invest the rest in a Fad, and make regular withdrawals to top-up your income as and when necessary. Can I run out of money? Yes. If you take withdrawals from a Fad you could run out of money, as it s difficult to predict exactly how long you will live for. Some people may accept this and that they will only have the state pension to live off in their later retirement years. However, some people will want to continue working with their adviser to make sure their Fad fund lasts their lifetime. Or that they have funds left over to pass to family when they die. If you invest your pension fund in a Fad, you may also want to consider buying an annuity in your later retirement when your needs and personal circumstances have changed. 8 /

9 What happens if I die? Is everything paid to my family tax free? It s not quite as simple as that. It depends if you have a Fad or an annuity, how your beneficiaries take the pension money, and what age you are when you die. If you have a Fad you can nominate a beneficiary to receive any leftover pension funds. They can take these as a lump sum or as a drawdown income (a Fad in their own name). If you have an annuity then what your family receives depends upon what options you picked when you took out the annuity. You might have selected a dependant s pension, or for the annuity to be continue to be paid for a guaranteed period. Or you might have selected value protection which means your beneficiary can receive a lump sum worth the original annuity purchase price less any annuity instalments you have already taken. For any of these scenarios, if you die before the age of 75 any lump sum or income paid out will be tax free, provided the settlement is made within two years. But if you die after age 75 then your beneficiary will have to pay tax on any lump sum or income. What happens if my beneficiary dies? Your beneficiary can in turn nominate a successor to receive your Fad pension fund on their death if any is left over. If your beneficiary dies within an annuity guarantee period, any remaining guaranteed annuity instalments will be paid out to another recipient. If your beneficiary dies before age 75 then the fund or annuity income passes to the successor tax free. But if the beneficiary is over age 75 when they die then the income from the fund or annuity income will be taxable. Benefits are paid tax free if the person dies before age 75. / 9

10 The changing face of retirement This infographic explains how times have changed to give you more financial options at retirement. Working Old style retirement Retirement is a single event Saving Guidance guarantee and Pensions Wise support Working Increased need for financial advice New style retirement Retirement no longer a single event Saving Work part time Active retirement Passive retirement 10 / Assisted retirement

11 Defined benefit Set income generated from State pension Supports different needs Flexi-access drawdown Non pension investments (Bonds, Isa) Annuity Financial planning produces flexible income plan to meet different needs from a combination of Income guarantee products State pension Defined benefit Supports different needs Active Assisted Part-time working Passive / 11

12 So could I pass the money to my grandchildren? Yes, you can nominate your grandchildren as your beneficiaries to receive your Fad fund when you die. And you can nominate as many beneficiaries as you want. If you re over age 75 when you die, any income your grandchildren receive will be taxed as income, so if they are non-taxpayers they should be able to take at least some of it tax free. You can nominate anyone as your beneficiary so not just family, but friends or your friends children. Can I access all my pensions in this way? No, it depends on the type of pension, and what the provider or trustee of that pension decides to offer. If you have an old style individual pension then you may have to transfer it to a new-style contract, by putting it on the Nucleus platform for example. This can have many other benefits such as being in more control of your money e.g. by being able to see how and when you re being charged. However, you need to find out whether there are any benefits or guarantees that you would lose by transferring to a new contract. Nucleus doesn t charge you to transfer your pension but some old-style providers might, so this is something to check with your adviser. Also, if you re entitled to tax-free cash higher than 25%, you may lose this right by transferring. 12 /

13 What about my occupational pension schemes? If you have a money purchase occupational pension scheme then it depends on what flexibilities the scheme decides to offer. Getting the full flexibility under the new rules may mean transferring from your occupational scheme to a new-style pension. If you have a defined benefit occupational pension scheme then to get the full flexibility you will have to transfer. However, if your pension benefits are worth 30,000 or more, the law says you must speak to your adviser to find out if a transfer is recommended or not. If you have a public sector defined benefit occupational pension scheme you are not allowed to transfer to a private scheme at all. It is strongly recommended that you speak to your adviser before transferring an oldstyle pension to a new one. / 13

14 Can I carry on contributing to my pension once I reach age 55? Yes, but how much you can pay in depends on what action you take. If you flexibly access your pension after age 55 by taking an income from a Fad, or taking an UFPLS then you can only pay in up to 10,000 each tax year. However, if you don t touch your pension, or only take tax-free cash from Fad and no income, or buy (most types of) annuity, then you can contribute up to 40,000. Once you flexibly access your pension you have 91 days to tell all the other pension schemes you contribute to that the lower limit applies to you. What happens if I have some small pension pots? You can take small pension pots as cash direct from the pension scheme as long as the pension scheme rules let you, and as long as they are worth 10,000 or less. You can only take a maximum of three small pension pots from non-occupational schemes in this way. But the number of small occupational pension pots you can take is unlimited. You can take small pension pots as cash direct from the pension scheme as long as the rules let you. 14 /

15 What happens to my means-tested benefits if I spend my retirement income money? People who spend their pension under the new freedoms may be treated as though they still have it for the purposes of calculating means-tested benefits. I already have an annuity do I have any options? The government announced in March 2015 that it wanted to introduce a second-hand market for annuities. This would give anyone who had already bought a money purchase annuity the chance to trade it in for either cash (which would be taxed as earned income) or a lump sum to invest in a Fad. These proposals are now being consulted on to see exactly how they would work in practice. However, if you receive an annuity from a defined benefit scheme then there are no plans to let you trade that in. If you are taking an annuity from a defined benefit scheme then there are no plans to let you trade that in. / 15

16 When can I start to get my retirement income? You can normally start to access your pension fund from age 55. This age limit is expected to go up to age 57 from 2028 once the state pension age increases. However, you don t have to dip into your pension fund at this age. If you leave it invested until you need it then it will have more time to potentially increase in value, although remember that investment values can fall as well as rise. Find out more Your adviser is the best person to speak to for more information. You can contact us too by phone, or Twitter. We re around from 8.30am 5.30pm. We may monitor or record the calls you make to us. You can also find out more about the Nucleus platform from our website We hope this booklet has helped to explain more about the pension changes and what they mean for you. Please get in touch if there s anything you d like to talk to us about. You can find out more about Nucleus by reading our client manifesto. Ask your adviser for a copy or download a pdf from our website. 16 /

17 And remember You should always seek financial advice or professional guidance when considering your retirement income options. Speak to your financial adviser or make use of the Pension Wise service the government s free, impartial service Please remember that the value of your investments can fall as well as rise, which could affect how much your pension pot is worth when you re looking to take income or invest in an annuity. Also, make sure you understand how much tax you ll have to pay on any income taken and any effect your income might have on any means-tested benefits you receive. / 17

18 Glossary Annuity This is an insurance contract that pays out a regular income, either for a set period of time or until you die. It is usually bought with the money from your pension fund. The income is subject to tax. Defined benefit occupational pension scheme Sometimes called a final salary pension scheme. It pays out an income based on how much you earned when you were working. The income is subject to tax. Drawdown or income drawdown A way of withdrawing income from a pension plan without buying an annuity. The income is subject to tax. Flexi-access drawdown Like drawdown but with more options. You can take up to 25% of your pension pot as a taxfree lump sum. The income is subject to tax. Money purchase occupational pension scheme Sometimes called a defined contribution pension scheme. It pays out an income based on how much you saved when you were working. The income is subject to tax. Personal allowance How much income tax you pay in each tax year depends on how much of your income is above your personal allowance. The standard personal allowance for 2015/16 is 10,600 this is the amount you don t have to pay tax on. 18 /

19 Public sector defined benefit occupational pension scheme Schemes for government or local government employees that share the characteristics of defined benefit occupational pension schemes, but are subject to different rules and restrictions on transfers. Uncrystallised funds pension lump sum (UFPLS) This is another way of taking pension benefits without going into drawdown or buying an annuity. It can be used to deplete the fund in one go, taking 25% tax free and the remaining 75% taxable. Any payment by UFPLS can only be made in one instalment, although you can take more than one UFPLS over time. / 19

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