How to make the most of the new flexible pension rules

Holly Thomas

The world of pensions is about to get far more flexible. No longer are we to be separated from our life-long retirement savings by the hefty tax charges imposed to access our money.

From April 2015 anyone who is aged 55 or over will be able to take their entire pension fund as cash – although only the first 25% will be tax-free.

The remaining 75% of the fund would be taxed at the saver’s marginal rate, rather than the current 55% charge for full withdrawal.

George Osborne also announced in his 2014 Budget that the guaranteed income threshold for drawdown eligibility has now been lowered to just £12,000 a year which has created much greater flexibility for all.  

Annuities still expected to be popular

Most experts expect the majority of people to still use an annuity to secure some or all of their retirement income despite the poor returns and new flexibility.

Annuities guarantee an income and as such will still suit those people who need to fix their income in retirement – especially for those with smaller pension pots.

But for those with larger sums saved, there are now many more options. As well as traditional annuities, capped and flexible drawdown options are now a feasible alternative for those about to retire. 

Learn more about Saga's annuities service here...

Watch out for charges

A survey this week claimed almost half (49%) said they would withdraw their pension lump sum and transfer the money into a bank account, savings account or ISA. 

With savings rates so low, leaving a large sum for a length of time could lose money in real terms. 

Plus, when you move money from a pension to another savings vehicle such as an ISA, you may be charged to withdraw your money and then charged again to re-invest it elsewhere. 

The whole process is riddled with complexities that could trip you up – and cost you dear.  

Learn more about Saga's one-year fixed rate ISA here...

Seek advice

The industry is unanimous that getting advice is crucial. Many people for whom an annuity would be a sensible choice could end up taking riskier alternatives by going it alone.

Joanna Fowler, Head of Wealth at Saga Personal Finance says: "It is very important that when preparing for retirement people understand and articulate their income needs. 

"Today's retirees have to plan for a further 20 to 30 years in retirement, so will need to plan for changing financial requirements, consider life events that they may face and understand the level of financial security they want. 

"This process may highlight the need for an annuity - as part of retirement income planning or as a stand-alone product solution. 

"Those that are unsure about their options or looking for hands on management of their money at retirement should seek professional financial advice."

What factors do you need to consider at retirement?

You need to decide how much income you will need in retirement, not just at the start, but throughout, taking into account rising price inflation.

Work out how much income you need to cover your basic living needs, this is the level of income you cannot afford to go below. 

This should be secured with guaranteed income, either from an annuity, or state pension, or a combination of the two. 

With the remainder of your pension pot you can choose to remain invested in an income drawdown plan.  

Shop around to get the best deals

It is vital to shop around to get the best deal if an annuity is used and to check if you are eligible for a higher, enhanced income, due to ill health or smoking habits.

It is also important to factor in taxation. Taking a withdrawal from a pension has irreversible tax consequences on both the withdrawal and on the remaining funds.

For example, basic tax rate payers could easily be pushed into the higher rate band. 

Ultimately, it is crucial to get advice to make sure you get it right first time.  

Saga's Financial Planning Service offers you a simple and straightforward way of ensuring your savings and investments are working hard to achieve your financial objectives. Learn more...

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.