IN THIS GUIDE TO YOUR RETIREMENT CHOICES WE WILL HELP YOU MAKE AN INFORMED DECISION ON THE RIGHT RETIREMENT CHOICE FOR YOU.
THE VALUE OF PENSIONS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE, YOU MAY GET BACK LESS THAN YOU INVEST.
TAX TREATMENT VARIES ACCORDING TO INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE.
At Bristol & West Financial Services, our approach to retirement advice is based on clearly understanding your financial situation, your goals, and how much risk you are prepared to take with your money. The expert professional guidance your financial adviser will give you helps you through this process. This means we can make sure that our solutions are right for you and that you have all the information you need to make a clear decision.
MORE CHOICE, MORE FREEDOM, MORE DECISIONS
THE GOVERNMENT WANTS YOU TO HAVE GREATER FREEDOM IN THE WAY YOU SPEND YOUR PENSION FUND. THERE HAS BEEN PLENTY OF TALK IN THE FINANCIAL MEDIA ABOUT RETIREMENT FREEDOM AND HOW EVERYONE CAN SPEND THEIR PENSION FUNDS AS THEY SEE FIT. BUT DO YOU SEE THIS AS AN EXCITING FREEING UP OF YOUR RETIREMENT CHOICES AND A LICENCE TO SPEND YOUR MONEY HOW YOU WISH? OR DO YOU WORRY ABOUT MAKING THE WRONG CHOICE? MAYBE YOU DON’T KNOW WHICH WAY TO TURN.
WHAT DOES GREATER FREEDOM MEAN FOR YOU?
Let’s rewind to 19 March 2014. Budget Day. Before George Osborne, the Chancellor of the Exchequer, stood to give his Budget speech, any choice you had on how to spend your pension fund was restricted by tax law. After all, the government gave away generous amounts of tax relief to encourage people to save for a retirement income so they made sure that was exactly what you did with the money. Then George Osborne dropped a bombshell that blew away these restrictions in one hit. He said: “I am announcing today that we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. “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.”
CHOICE IS GOOD AS LONG AS YOU MAKE THE RIGHT ONE
Retirement freedom creates more choice; but it brings with it more risk. We may not have liked the restricted choice we’ve had until now but it did protect us from running out of money. But we now live in an era in which we live longer, are retired for longer. All of us need to make our savings last for longer. This is only possible if we make the right choices. We can only make the right choices with the right advice. In this guide we will take you through the choices that are on offer so that you can approach retirement feeling more informed and with the help and advice you need.
GETTING READY FOR RETIREMENT THE NEW RETIREMENT FREEDOMS CAN HELP YOU PLAN AND CONSTRUCT YOUR RETIREMENT INCOME BUT ONLY WITH THE RIGHT PREPARATION AND ADVICE.
YOU MAY BE RETIRED A LONG TIME
In its report Retirement Income Uncovered, Old Mutual Wealth discovered some interesting facts from the people it interviewed. On average men retire at 64.6 and women at 63.8. At these ages men can expect to live until 86.3 and women until 86.9 (Source: Old Mutual Wealth – Retirement Income Uncovered.) Being retired for 21 years or more means you need to plan for an income that funds retirement for this long. Looking at it another way, at 65 you have a one-in-four chance of living to 94, and almost a one-in-ten chance of living to 100. To make your money last this long you need to plan carefully and as early as possible. Your Bristol & West adviser will help you prepare so that you avoid the risk of ruin.
RETIREMENT IS CHANGING
With the demise of final salary schemes most people are taking more of a portfolio approach to retirement income. As well as traditional pension savings and the basic state pension, people are using ISAs and other investments, such as bonds, to supplement their incomes. Also, semi-retirement is becoming more common with people continuing to work part-time in retirement either through necessity or simply because they want to. In fact, people approaching retirement expect part-time work to contribute 27% of future retirement income (Source: Old Mutual Wealth – Retirement Income Uncovered).
DON’T PAY ANY MORE TAX THAN YOU HAVE TO
Having spent a long time carefully building your retirement fund the last thing you will want to do is give a big chunk of it to the tax man. This is another reason why you need to plan carefully how you use your retirement fund. Take too much out too quickly and instead of being a basic rate taxpayer, overnight you can become a higher rate taxpayer. By carefully planning with your Intrinsic adviser you will work out how best to use your tax-free cash entitlement so you maximise your personal allowance. And if you must draw a large sum from your retirement fund you can at least do so in full knowledge of the tax implications so you do not get a nasty tax shock.
PLANNING MAKES A REAL DIFFERENCE
Research shows that having a target income and getting the right financial advice can make a marked difference to someone’s retirement income. Retired people without a target have an average yearly retirement income of £17,500. Focus on a target and take advice on how to hit that target and the average income rises to £26,000 (Source: Old Mutual Wealth – Retirement Income Uncovered.)
How does this happen? It’s all about understanding how to use the available products to construct retirement solutions that aim to hit your target. This may mean using annuities, flexi-access drawdown, UFPLS, other investments or a combination of several products. But the only way to know what products to use and how to use them is with professional financial advice. And even though you may have already started income drawdown, this doesn’t mean you can no longer invest in a pension plan and enjoy the tax benefits. You can still invest up to £10,000 in a tax year and receive tax relief at your marginal rate of income tax.
UNDERSTANDING WHAT HAPPENS IN THE EVENT OF YOUR DEATH
PLANNING YOUR RETIREMENT ISN’T ONLY ABOUT YOUR RETIREMENT INCOME. YOUR RETIREMENT FUND IS ALSO AN ASSET AND YOU NEED TO CONSIDER WHAT YOU WANT TO HAPPEN WHEN YOU DIE.
Choices exist for dealing with any pension fund you may have left when you die. What happens also depends on how old you are when you die.
IF YOU DIE BEFORE YOU REACH AGE 75
There are three choices each receiving different tax treatment:
- Pay the remaining fund as a tax-free lump sum to anyone you choose.
- Use the remaining fund to create a flexi-access drawdown for any beneficiary. This will pay a tax-free income for the life of the beneficiary.
- Use the remaining fund to buy an annuity for your spouse or other financial dependant.
IF YOU DIE AFTER YOU REACH AGE 75
Again there are three choices each receiving different tax treatment:
- Pay the remaining fund as a lump sum to anyone you choose. The beneficiary will pay tax at 45% in the 2015/16 tax year; in subsequent tax years income tax will be payable at the beneficiary’s marginal rate.
- Use the remaining fund to create a flexi-access drawdown for any beneficiary. The payments will form part of the beneficiary’s taxable income.
- Use the remaining fund to buy an annuity for your spouse or other financial dependant. The payments will form part of the beneficiary’s taxable income.
NAVIGATING THE CHOICES
FROM 6 APRIL 2015 THE WAY YOU USE YOUR RETIREMENT SAVINGS CHANGED.
These changes can have implications if you get it wrong. For example, you may create a large tax bill that you wouldn’t otherwise have had. Also, not all your pension plans may allow this new freedom of choice. You may have to move the money to an environment that does allow it. This might be a good thing to do; it might just as easily be a bad thing. You can avoid getting it wrong with the right advice.
TAKING A TAX-FREE LUMP SUM
You can take 25% of your pension fund as a lump sum, completely tax free. This hasn’t changed and has been this way for many years.
CREATING A RETIREMENT INCOME
There are two ways you can use your pension to do this: buy an annuity or invest in flexi-access drawdown.
An annuity will pay you an income until you die. Guaranteed. This is the annuity’s big advantage and makes it the starting point for all your retirement planning. We believe it’s essential for you to receive a regular income to cover your day-to-day expenses. However, guarantees come at a cost. The amount of income an annuity pays you depends on two things: the size of your pension fund, and how long you might live based on how old you are now. So the older you are the more income you will receive. Your annuity payments form part of your total taxable income and incur income tax. You can also choose what type of annuity you have:
- One that pays you a guaranteed income until you die and then stops or
- Or one that pays you a guaranteed income until you die and then continues to your surviving spouse or dependant.
- Maybe one that stops paying as soon as you die or
- Perhaps one that guarantees to pay out for a minimum time, for example five years, even if you die earlier
- One where the income stays the same or
- Or even one where the income increases each year.
Each option you add makes the annuity more expensive and reduces the income it pays you. Your Intrinsic adviser will be able to help you make the right choice for your circumstances.
SHOPPING AROUND – THE OPEN MARKET OPTION
You do not have to accept the annuity your pension provider offers you. If you do one thing and one thing only, make sure you shop around for the best annuity you can get. This may sound like obvious advice but around 60% of retired people do not. (Source: Financial Conduct Authority – 2014 thematic review.) Shopping around for the best annuity can make an enormous difference to your retirement income.
FLEXIBLE ACCESS DRAWDOWN
Income drawdown has been around for a while but there were restrictions wrapped around it. The new retirement freedom removes these restrictions and creates the new flexi-access drawdown. If you think of flexi-access drawdown as a bit like a bank account. You keep control of your pension fund, investing it and drawing down income as you need it, when you need it and have complete flexibility over how much you take out and how often you take it. Once you have drawn your 25% tax-free cash entitlement any further withdrawals form part of your total taxable income and incur income tax
The complete flexibility that flexi-access drawdown gives you is its big advantage. On the downside it brings two big risks:
- You don’t make the investment returns you need to support your withdrawals
- You withdraw too much too quickly and run out of money. We call this the ‘risk of ruin’.
TAKE IT ALL AS CASH – THE UNCRYSTALLISED FUNDS PENSION LUMP SUM (UFPLS)
As long as you are at least age 55 you can cash in your pension fund provided you haven’t already touched it. If you cash in your entire pension fund, 25% will be tax free and the other 75% will form part of your taxable income and incur income tax. The advantage of UFPLS is the way it enables you to access a large amount of cash, perhaps to generate retirement income in other forms, property for example. The disadvantages are twofold:
- The temptation to spend it on luxuries such as holidays and nice cars
- The tax you will inevitably pay – you may lose as much as 45% of the taxable portion in tax. Be clear: even if you are usually a basic rate taxpayer, the lump sum from your pension fund could quite easily elevate you into the highest tax bracket.
MANAGING YOUR FINANCES EFFECTIVELY CAN BE A CONFUSING BUSINESS. THE FINANCIAL WORLD IS COMPLEX, AND MAKING THE RIGHT DECISIONS FOR YOUR FUTURE CAN SEEM A DAUNTING PROSPECT.
At Bristol & West Financial Services, we take pride in offering a personal service that takes into account your individual circumstances. Your financial situation is unique, so we work hard to understand your goals and aspirations, and make financial recommendations based on a comprehensive and detailed analysis of your needs.
Through our comprehensive offer, Bristol & West Financial Services advisers can provide you with advice on every aspect of financial planning:
- saving and investing for the future*
- planning for your retirement**
- estate and trust planning owning your own home***
- protection against risk
- * The value of the investment can go down as well as up and you may not get back as much as you put in.
- ** The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
- ***Your home may be repossessed if you do not keep up repayments on your mortgage.