The biggest pension changes for generations only came into force on 6 April – but with greater freedom comes more risks.
The changes at a glance
The rules have changed about what you can do with your pension money, whether you have pensions in place or money set aside for a pension plan. You’ll have more choice and control when you reach age 55 – but you should make sure you are ready for changes, which may dramatically affect your future.
You can now:
Take the whole fund as cash, with 25% being tax free
Use some or all of your pension to buy a guaranteed income for life if you want to
Withdraw any amount you like, over any period of time
Take out one or more lump sums however you like, with 25% of each being tax free.
How you take your pension could have many consequences, including putting you in a higher tax bracket even if that is not normally the case. Other changes like the abolition of the 55% death tax (you can now pass on unused pension savings to a loved one tax free), new pension contribution rules and the tax treatment of annuities could also have a meaningful impact on your circumstances. Yet a recent Brewin Dolphin survey conducted by YouGuv showed that only 36% of 55-65 year olds are likely to seek financial advice.
The complex pension landscape makes it more important than ever to have access to advice that is tailored towards your situation.
Tim Walker Divisional Director and Head of Office at Brewin Dolphin in Exeter is recognising an increased demand for clear guidance. “There are a lot more people seeking straightforward advice. Many current pension arrangements are just not suitable. Previous safeguards gave people confidence that their future was assured to some degree – but by removing these, people need to act sensibly to help ensure their pension fund lasts them through retirement.”
The risks of doing nothing, or acting without caution
You may decide to leave your money where it is and to continue with the plans you have for retirement (taking an annuity has been the traditional route). But you could miss out on opportunities as well as expose yourself to unnecessary risk. Be aware of situations that could affect you.
–Don’t pay more tax than you should. You could pay thousands of pounds more by withdrawing all of your pension pot(s) in one go. At any time, only 25% of what you withdraw is free from tax. The remaining 75% is treated as income and subject to income tax – but there may be ways to reduce what you pay.
–Make sure you have enough to last. If you retire too soon you may not have enough to last for your retirement. Delaying your retirement for a few years could make all the difference. Traditionally, most people were forced to buy an annuity to sustain their retirement, but now you don’t have to.See how long your pot could last with our calculator and find out which options could work best for you.
–Avoid unnecessary gambles. Investing properly for the future requires skill and insight. Make sure you are not tempted by questionable schemes or be stuck with a buy-to-let property you can’t sell or rent out.
–Beware of inflation. Leaving your pension in a bank account could expose you to inflation and have a serious impact on your retirement pot. So it’s worth exploring the different ways you could make your money work harder to ensure your pension doesn’t diminish too quickly.
“The main risk for people is running out of money,” says Tim Walker. “Clients are often in the dark about structuring their income and they frequently underestimate how long they will live and the long-term impact of inflation. We talk people through their options, making sure they can maintain their lifestyle first of all, and then look at discretionary spending and their legacy wishes.”
It’s important to be mindful of your individual situation. Because of varying incomes and outgoings, tax and family circumstances, what works for someone else may not suit you. There are serious risks of not taking appropriate advice – but the right advice could easily pay for itself.
Why you need to act now to make the most of pension tax relief
With the next Budget fast approaching, changes to the level of tax relief on pension contributions – particularly for higher earners – may be imminent.
The Conservative party unveiled plans during the election to reduce pension tax relief for anyone earning more than 150,000. And with a Budget due on 8 July, there may not be much time left to make the most of the current rules.
You need to act now to take full advantage of pension tax relief – it could be a case of ‘use it or lose it’
What is the present situation?
As things stand, tax relief of up to 45% is available on pension contributions and there is an annual contribution allowance of 40,000* (this is the maximum contribution amount on which tax relief can be claimed in a tax year).
What might change?
It is impossible to foresee what the Chancellor will pull out of his hat on Budget Day, although proposals for changes to tax relief on pension contributions were included in the Conservative election manifesto.
The proposals were to reduce the 40,000 annual allowance by 1 for every 2 an individual earns over 150,000.
This would mean that, for example, a person earning 190,000 would have a 20,000 annual allowance while someone earning 210,000 and over would have a 10,000 annual allowance.
While we cannot be certain of the timing of any potential changes, they could well come into effect on Budget Day itself, so we believe that it is prudent to take steps now.
TABLE: How might high earners see their tax relief restricted?
Annual contribution allowance
Amount of tax relief available (up to 45%)
150,000 or below
210,000 or more
What do I need to do?
Here are some things you may want to consider (particularly if you earn over 150,000 and pay the 45% rate of income tax):
-Contributing the maximum amount you can into your pension before 8 July (as long as you have sufficient disposable income and can afford to do so).
-Bringing forward any planned contributions before 8 July if you are making regular monthly payments into a pension.
The pension regime is highly complex, so it is vital to get expert advice tailored to your situation. Our specialist financial planners can give you the specific guidance you need – please call your usual Brewin Dolphin contact and they will be delighted to help you.
Remember – time could be running out for your pension tax relief, so it is important to act now.
*This also encompasses employer pension contributions and benefits built up in final salary schemes.
The value of investments can fall and you may get back less than you invested.
Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation.As mentioned these may be subject to change.
No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.