Spending The Nest Egg
Far-reaching budget changes mean we have more freedom to spend our pensions as we like. What does that mean for our retirement years?
In April this year the pensions landscape changed dramatically, with Chancellor George Osborne making sweeping changes to the way these savings vehicles work. They are now more flexible than ever, giving individuals increased control over how and when they access their pension pot.
For the generation currently in retirement, that will be welcome news. In McCarthy Stone’s survey The Colour Report, 80 per cent of respondents over 75 felt that living life to the full was more important than leaving an inheritance; 75 per cent said their priority was to take more holidays; 20 per cent were hoping to go on a world cruise; and 19 per cent had planned a round-the-world trip!
Former pensions minister Steve Webb famously said that people should be free to blow their life savings on a Lamborghini, even if they ended up living on just the state pension. While most of us wouldn’t be so rash, it’s clear that the mood is to make the most of retirement, if at all possible. So, how can you plan for this adventurous older age?
The new-style pension
The new pension freedoms provide more opportunities to structure your income to suit you. So, from the age of 55, you can do what you want with your pension pot. One in five retirees has a mortgage, and overall 30 per cent have some kind of debt, so paying that off could well be a priority. If you are in a defined contribution pension scheme, you no longer have to buy an annuity (though it is still an option). Also, access to drawdown pensions – where you keep your pot invested, most probably in the stock market, and draw an income to live on – has been increased.
You can take your whole pension pot in cash on your 55th birthday and invest it in anything you want, from shares to wine, art or stamps. The first 25 per cent will be free of tax, but above that you will be taxed – 20 per cent for basic-rate taxpayers, 40 and 45 per cent for those in the higher and top-rate bands.
Alternatively, you can take smaller sums, with 25 per cent of each withdrawal tax-free and the rest taxed as income. If withdrawing a single lump sum would push you into a higher tax bracket, you can phase withdrawals over a number of years. Or you can take the 25 per cent tax-free cash and use the balance to provide an income, which will be subject to tax.
To use your pension pot as tax-efficiently as possible requires planning. You will have to know how much you need to retire on, where the funds will come from and whether they will have to be topped up. Not all pension companies and schemes currently offer the new freedoms, so take time to consider your options. If you are about to retire and want to access your cash, you may need to transfer your savings to another company, which could incur costs.
What’s right for you?
The Government is committed to providing free advice, and now anyone aged 50 or over with a defined contribution pension can use Pension Wise, a service that offers a free face-to-face or telephone session with a trained adviser. This is not regulated financial advice, however, so the recommendations won’t be specific to you. If that is the level of service you require, you will have to pay a financial adviser.
Find out more
To set up a face-to-face or telephone session, call Pension Wise on 0300 330 1001. The website pensionwise.gov.uk has information to help you understand your options, plus advice on avoiding scams.