Managing Your Cash Flow

Pension changes open floodgates for possible savings splurge

5 min read

07 April 2015

Former editor

Alterations to the framework of the defined contributions pension scheme arrangement means those over the age of 55 are now able to access as much as they like.

Announced in chancellor George Osborne’s 2014 Budget speech, those retiring will no longer be required to buy an annuity to provide a fixed and regular income.

The set up before had meant retirees could cash in up to 25 per cent of a pension pot, tax free, after which they would then have to reinvest the money or take an annuity. Despite allowing those wishing to take control of their pensions to do so, the 25 per cent tax free cap will remain in place.

According to the government, the 320,000 people who retire each year with defined contribution pensions will have “complete choice” over how they access their pension. To support people in making the “decision that best suits their needs”, everyone with a defined contribution pension has access to free and impartial face-to-face guidance.

Writing for Real Business back in March 2014, Evanridge Properties director Huw Evans said: “Like many business owners I have a SIPP (Self invested Personal Pension), so the part of the new rules which particularly stands out, is not the ‘cash it and spend it’ opportunity, but the ‘keep it there’ scenario. Under the new rules, I can leave my investments in the SIPP to compound in a no tax environment. This means that I can decide which assets to realise and when – and my investments will continue to grow tax free in the meantime.

“Now business owners can genuinely take control of their own financial futures and these reforms have given us just the right tools for the job.”

In March, Scottish Friendly, a pension firm, warned that allowing people to cash in on annuities will “break a generational agreement between pensioners and taxpayers”.

Commenting then, Scottish Friendly director Neil Lovatt said: “This is like taking an already burning building and fuelling the flames with petrol.”

Lovatt explained that, because around 32 pert cent of a 30-year pension pot will have been generated though tax relief funded by the taxpayer, the taxpayer will end up paying twice to support the current generation of retirees.

“Anyone who thinks that they will get a good deal by cashing in an existing annuity is living in cloud cuckoo land. The pensioners most likely to want to cash in their annuity are those that don’t see the need for long-term income, namely those in poor health,” he added.

“This will be known by those pricing the lump sum payment and, as such, it’s more than likely that people selecting this option will be shocked to find their implied longevity – the extent to which the pricing takes into account how long they are expected to live – is surprisingly short.”

Read more on the pension changes:

Research from travel and leisure agency Souk suggested that as many as three quarters of those planning to withdraw pension money under the new framework plan to spend some of it on travel.

Going into more detail, Richard Downs of travel companies Iglu and Planet Cruise said: “At the moment the over-65s might trade down their house to release equity, but these pension changes effectively fast-track this release, allowing people to make such life choices at an earlier age.”

Adding his own worries, Jon Hatchett, partner and head of corporate DB at Hymans Robertson, said: “The last time we had a rush of transfers out of DB [defined benefit] schemes in the late 80s it ended in tears with many advisers getting sued. Over one million people are estimated to have been led to make the wrong choice. It’s vital that we learn from the error of the past.

“Employers providing DB schemes and the trustees overseeing them must ensure scheme members have good support to make choices that are right for them. Trustees owe a duty of care to members, but it is also just the right thing to do.”

More detail on the government’s new pension structure can be found by accessing this dedicated HMRC guide.

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