My pension wise experience
As part of its new pension freedoms, the government launched Pension Wise in March 2015, a service offering free, impartial guidance. Ahead of its launch, there were lots of news reports about how the site would be deluged with queries and not have enough experienced staff to deal with them and how it would not go into enough detail to help many people.
But the service is free and I was badly in need of some pointers myself, so I decided to test it out to see how useful Pension Wise really is.
Excited by all the talk of the new pension freedoms and wanting to contribute financially to the MSc my daughter is taking in September - which costs a whopping £11,200 - I had started to consider 'freeing up' some or all of a small pension I had almost forgotten I had.
I was worried about the tax implications of taking the whole fund in one go, so I turned to Pension Wise in the hope it would help explain my options. What follows is my experience with the service.
You can only get one appointment, and you need to be planning on taking out some or all of your pension within the next six months and be over 55 to access the service.
Before going ahead, I checked what my pot (about £16,500) would generate for me if I took 25% tax-free in cash and turned the rest into an annuity. Comparing annuities on the Money Advice Service website, a quote for a single annuity on a pension pot of £12,375 (after taking £4,125 - 25% - in cash) with no guaranteed period and inflation-linked came to the grand total of £28 a month.
So it's not surprising so many people in their 50s and 60s are considering cashing in small pensions - £7 a week barely covers a daily loaf of bread.
Initially, I thought a face-to-face appointment would be most helpful but when I called to book one, I found that Pension Wise only works out of selected Citizens Advice offices, and the nearest one to my home in north London was miles away in Hackney, while the closest one to the Moneywise office in Aldgate was in Southwark - so not exactly handy for nipping out for a chat during an hour's lunch break.
I opted for a 45-minute telephone appointment and was instantly emailed a list of things to do to prepare for the call. Pension Wise advised me to:
- find out the value of my pension pot(s) by checking my pension paperwork or asking my provider;
- get a State Pension statement by calling the Future Pension Centre; and
- think about my financial circumstances in general and plans for retirement, including: sources of income (such as salary, benefits, savings, and investments); debts and repayments; when I wanted to stop working; and if I wanted a fixed or flexible income in retirement.
It took me several phone calls to my pension provider to get an up-to-date statement of my plan and when I rang the government's Future Pension Centre, I was advised that it could take up to 10 working days to receive a State Pension forecast, so you do need to be patient organising your paperwork before accessing guidance.
The phone call
It's a bit cloak and dagger when the guidance specialist phones you, as they have to give a password and number so you know it's a genuine Pension Wise call. But very soon after you are opening up to a complete stranger about the ins and outs of your personal finances.
I was impressed by how quickly the adviser got to grips with my main concern: the tax implication of taking my whole pot, as only the first 25% is tax-free. But he also spelled out the pros and cons of all five things you can do with your pension: 1) leaving your pot untouched; 2) getting a guaranteed income/annuity; 3) taking your money flexibly; 4) cashing in your whole pot; and 5) mixing your pension options.
Most useful of all, he advised me to find out the charges you can incur every time you take cash out of your pension. He also suggested a list of questions to send to my pension provider, from asking if any special terms apply - such as a market value reduction or guaranteed annuity rate - to checking whether it offers flexi-access drawdown and, if not, whether my pot could be moved to another account that does offer this.
I made notes as we went along in what turned out to be a 60-minute chat but the pension adviser also said that he would send me a summary of the phone call - though it could take up to two weeks to arrive.
When the letter from Pension Wise did arrive, I was very disappointed to see that although it was headed 'Record of your pension appointment', other than quoting the total value of my pension pots, it was a fairly generic factsheet outlining what the five pension options are, plus other general information on what if you wanted to continue to work or what if you were unsure about your retirement plans.
When it mentioned taking out an annuity, it just said there are different types 'and it's important to buy the right one for you' - but didn't give any information about what those types of annuities are or even mention that there are enhanced annuities - something that was covered over the phone.
It wasn't at all personal and though it listed questions to ask your provider, it didn't go into the same level of detail covered by the pension specialist. Indeed, I was glad that that I'd made notes during the phone call.
After my phone appointment, I sent a letter to my pension provider asking for more information on cashing in my plan. When I hadn't heard back within a week, I phoned them and was advised that it could take 10 to 15 working days to receive a written response to my queries but the person I spoke to was able to answer my questions over the phone.
She confirmed that my pension fund had no early exit fees but that I could only make one withdrawal in a tax year. This had to be more than £1,000 but if I was making a partial withdrawal, I had to leave at least £5,000 in the plan.
If I wanted flexi-drawdown, I would have to set up a new plan and would need a minimum fund of £50,000 to do this, and there would be a charge for setting up a new pension plan.
Reaching a decision
I worked out that if I were to take £11,500 of my pension fund, 25% - £2,875 - would be tax-fee. The remaining £8,625 would be taxed at my highest rate of income tax. So if I paid 20% tax, I would give the taxman £1,725 and would receive £9,775.
However, on the 40% tax band, I would pay £3,450 in tax and would receive just £7,550 of my £11,500. Given that you only have to earn more than £42,385 a year to be paying 40% tax, you can see how easy it is to get over that threshold - even with a small pension.
The whole process of weighing up my pension options has taken around six weeks - but at least it means I haven't been able to rush into a decision I might regret.
It has also given me a chance to see how well my pension is doing. In the past month, it has grown by £92 - better than anything I'd get on cash in a savings account. Its good performance, plus the tax I'd pay on freeing my money, means I won't cash it in yet.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.