6th April – the start of the 2015/16 tax year, and as those of you approaching retirement may have noticed, the instigation date of some ‘exciting’ new pension laws.
‘Flexible Drawdown’ is now available to all, meaning that pension savers have the freedom to access their pension pots as they wish.
The suitability of ‘drawdown’ will depend very much on the circumstances of each individual and because of the huge array of options available, seeking independent advice is essential.
No longer shoe-horned into purchasing an annuity, in theory, people could pull out the entire lot in one hit . . . this would undoubtedly be a bad move for most, as the withdrawal would be counted as income and taxed at marginal rate (which could be up to 45%) – also, for people with little other pension provision, a move like this could line them up for a retirement lived in abject poverty!
As a rule of thumb, drawdown will suit those who have a higher appetite for risk, as it generally involves staying invested for longer and shouldering some investment volatility. Also it may be of greater appeal to those with other retirement income provisions, and thus a higher capacity to cope with potential loss.
To give an example of how drawdown can appeal: for a 60-year old married person looking to buy an annuity with a 50% spouse benefit and index linked payment, the rate they would receive is about 2.5-2.7%. If the individual was willing to continue to stay invested and access his pension via drawdown, it is feasible that he/she could take 4% a year as income, have better death benefits, and also possibly still benefit from future investment growth.
One other change is that the tax free portion of your pension (25%) can now be taken as a part of regular income. So those who have no real need of a huge lump sum at retirement (which would sometimes subsequently be stuck in a tax-inefficient, low interest savings account) can now take it bit by bit and have the benefit of maintaining the majority of their retirement savings in a tax free environment.
Those thinking of raiding their pension nest egg to fund a buy-to-let property must carefully consider the benefits. Residential property is not very tax efficient in comparison to pension savings, and being a landlord can be fraught with dangers, especially if using mortgage leverage into retirement to help finance property purchase.
For more info on drawdown & annuities please take a look at our previous blog here Pension Options – Annuity vs Flexible Drawdown