Only a few days to go until the new pension freedom legislation unlocks pension schemes for anyone over the age of 55.
With billions of pounds tied up in pension schemes, there is the potential for fraudsters to encourage irresponsible behaviour, in an effort to access some of this money.
While everyone will be offered guidance, not everyone will take advice before cashing in their pension. This will potentially result in unnecessarily high amounts of tax being paid, especially if the money is taken out at the beginning of the tax year. Income tax of 45 per cent may be payable if too much is taken out and inheritance tax may also be payable on assets that have been removed from the protection of a pension wrapper.
Members of funded final salary schemes will also be able to convert these schemes into a fully accessible lump sum. This generally won’t be a good idea for most members of these schemes as they will be giving up a valuable, guaranteed inflation-proofed income for the rest of their lives.
For some members of final salary schemes, transferring out to a flexible pension may well be the right thing to do. For example, some final salary pension schemes will cease paying out on death of the member, if they are not married. A final salary pension of £10,000 per annum could produce a transfer value of up to £300,000, which would be paid out tax-free on death in many circumstances. So anyone in poor health, where the death benefits are important, may choose to transfer out of their final salary pension.
The Pensions Minister, Steve Webb, recently announced that he would like existing pensioners who have already bought an annuity to be able to benefit from the new pension freedoms and the detail should become clear in the coming weeks.
The small matter of a General Election may derail some of the Government’s plans, but the main changes will take effect on April 6, regardless of opinion polls or elections.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: firstname.lastname@example.org