The Pension Freedom rules, announced in the 2015 Budget, provided those with Defined Contribution pensions with much greater flexibility and choice as to how to draw their pension. Alongside the announcement of the new rules, the Government launched the Pension Wise service, which provides free and impartial guidance and information for those approaching retirement.
Pension Wise appointment
Anyone aged 50 or over, with a UK based Defined Contribution pension, can book an appointment through the Pension Wise service. The appointments last around 60 minutes and are carried out over the phone or face-to-face through Citizens Advice delivery centres. The purpose of the appointment is to go through the various ways you can access your pension savings and will also cover the tax implications of each option. It will also explain the ability for the pension holder to shop around, particularly in relation to the purchase of pension annuities, and help the user identify pension scams and avoid becoming a victim of what is sadly a growing trend.
Pension providers are now compelled to nudge consumers towards Pension Wise when they make direct contact with a provider to access their pension savings. Prior to June last year, pension providers were only compelled to signpost the Pension Wise service to those accessing their pension; however, the rules have been strengthened, so that the consumer who approaches a pension provider directly must be referred to the Pension Wise service prior to being able to access their pension.
What to do next
It is clear an appointment with Pension Wise may be a positive step and a way of arming yourself with information as to the options that are open to you. However, it is at this point that the crucial decisions need to be taken, where signposting and generic guidance won’t provide the answers.
The introduction of the Pension Freedom rules has undoubtedly been a success and put the control in the hands of individuals as to how they access their pension pot. However, the rules are now significantly more complex, and there are many variables to consider that a guidance service simply can’t take into account. Furthermore, depending on the action taken with the accumulated pensions, there may be no way of undoing a mistake which could prove costly over the long term. This is where independent and holistic advice can help you take the right decisions.
Looking to the long term
One of the first areas to consider is how your pensions are currently invested, and this is beyond the scope of a Pension Wise appointment. Flexi-Access Drawdown remains a very popular way of drawing benefits and this will mean that the pension remains invested for the long term. It is, therefore, crucial that the funds in which the pension pot is invested perform well and offer good levels of diversification. This is where a clear, defined investment strategy provides a significant advantage, although any investment strategy put in place should be reviewed regularly to ensure that the plan remains appropriate for your evolving needs and objectives.
Many people acquire a series of workplace pensions throughout their lifetime and holding multiple plans can make successful investment planning all the more difficult. One option is to combine plans into a single arrangement, and whilst this often provides advantages, it isn’t right for everyone. This is where taking tailored advice, rather than relying on guidance, can look at the specific options and advise on the right path to take.
Watch out for pitfalls
Different pension schemes and arrangements have varying rules, depending on the scheme. Some older style pensions, in particular, carry valuable benefits, such as enhanced Tax-Free Cash, guaranteed annuity rates or growth rates. This may not be immediately apparent from communications received from the pension provider and discovering the finer details of a pension arrangement is an important step to take before looking to draw benefits from a pension. Taking individual advice can discover all aspects of an arrangement and potentially avoid losing a valuable benefit by taking the wrong course of action.
The tax trap
The tax treatment of pension arrangements carries several traps, which the unadvised pension holder could easily fall down. For example, drawing a flexible income could mean that limits are imposed on making further contributions. Pension holders may also wish to access tax-free cash but taking an income may have an adverse impact on their tax position if they are still working. This is where a guidance service can only go so far and is no substitute for personalised advice.
Guidance is limited
Whilst a useful starting point for those approaching retirement, it is important to recognise that a Pension Wise appointment can only offer guidance on the options available. Pension Wise cannot provide advice, which is bespoke and takes into account your personal circumstances. This is where someone who has used the Pension Wise service may question their next steps and moving on to seek independent advice can help structure pension arrangements to suit the retirement you are aiming for.
Please speak to one of our experienced advisers who can provide the right advice tailored to your specific aims and objectives, here.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.
