The new pension regime: will you need advice?
If you're approaching retirement, you have some big decisions to make following sweeping pension reforms. But do you understand the implications and the best way forward for you?
The options can seem baffling but there is help coming in the form of free guidance as part of the government service called Pension Wise. This follows changes to rules from 6 April designed to give retirees aged 55 and over freedom to use their retirement pot as they wish, whether to spend it, save it, invest it, convert it into an annuity - or any combination of the above.
The free guidance service is being offered by The Pensions Advisory Service (TPAS; pensionsadvisoryservice.org.uk) and the Citizens Advice Bureau (CAB; citizensadvice.org.uk).
You can register your interest to speak to someone to get guidance on your options at pensionwise.gov.uk.
So far, there are more than 3,000 workers at CABs across England and Wales who will offer face-to-face guidance, while around 40 at TPAS will provide a telephone service. In addition, the Treasury, which is rolling out the entire service, is working on its own guidance website.
The free sessions are expected to last a maximum of 45 minutes, to ensure anyone taking a pension is given the guidance they need before making any critical decisions.
Michelle Cracknell, chief executive of The Pensions Advisory Service, says: "People struggle with the retirement option choices and do not necessarily know how or where to access help.
"Guidance is the start of the journey that helps people know the information they need, the questions to ask and where to go. We believe that guidance will help people understand their options and, as a result, some may choose to take advice as they will understand the importance of the decisions they will be making."
There has been some controversy about Pension Wise – not least accusations that the guidance will be given by people under-qualified to do so or unfamiliar with the world of pensions.
But The Pensions Advisory Service says it wants recruits to have pensions experience; while Citizens Advice has been seeking new recruits as guidance guarantee agents and guidance caseworkers – the former don't need pensions knowledge but must have good numeracy, and communication skills, while caseworkers need a good knowledge of pension law and practice.
All of the workers will have to complete a course approved by City regulator the Financial Conduct Authority (FCA) and the Treasury. Who you speak to depends on the level of help you require and whether you want a face-to-face meeting or a telephone conversation. You may meet a Citizens Advice agent, for example, and then be passed to a caseworker, and finally be told to take independent financial advice.
The Pension Wise service should help people understand the basic questions they need to consider, understand the risks of taking money out, the tax implications, the need to have money for later life and the kinds of options to consider.
However, wherever you access this service, remember you'll be getting guidance, not full-blown advice. "If you have a larger pension fund, say £50,000 or more, or if you have more than fairly basic needs, then you should seek independent financial advice," says Patrick Connolly, a certified financial planner at independent financial adviser Chase de Vere.
Specific products such as income drawdown or specific annuities cannot be discussed by Pension Wise, and you cannot be sold products. So, for example, if you want to buy an annuity you'll need to work out the best one for you and then speak to a broker or a specific provider.
If you want to know what action to take or products to buy, you'll need an expert adviser. "This service won't be free - just like an accountant or lawyer, the independent adviser needs to be paid to advise you. But as pension decisions are often irreversible, paying for some advice is not a bad idea," says Ros Altmann, pensions expert and the government's older workers champion.
The pension rule changes apply if you're part of a defined contribution or money purchase plan – this includes stakeholder pensions and self-invested personal pensions. The first 25% can be taken tax-free and the tax on the amount above that will be charged at the saver's marginal rate, rather than the current 55%.
Altmann adds that for most people considering the changes, just leaving their pension alone will be the best option or perhaps taking tax-free cash and nothing else, unless they really need the money. "Withdrawing it all will have tax consequences, which they need to understand. Although if it is a very small fund, then many people may rightly decide they would be better to take the money and spend it, perhaps to repay debts," she adds.
Alternatively, if you have a larger fund, a blend of options may be the best approach. This could include keeping some money in cash, leaving the rest invested in a mix of bonds, equities, and property, and wrapping as much as possible in a tax-free Isa. Or you could buy an annuity to cover essential outgoings and invest the rest.
Those in final salary, or defined benefit schemes, can move their money to an eligible pension scheme but city watchdog the FCA wants to make people take specialist advice before doing so. This is because you risk losing valuable benefits by transferring out of a final salary scheme, perhaps in the hope of releasing a lump sum.
Altmann adds: "The level of financial knowledge about pensions is so low that it will be a big challenge to help people understand their options but it is important they do know what the implications of any decisions are."
The Pension Wise guidance service - what to expect
- You'll be told of the scope, purpose and limitations of the session.
- You'll be asked for size and detail of your pension savings, so gather this beforehand.
- You'll be asked to identify options that are relevant to your financial and personal circumstances.
- You'll get guidance on other sources of information and advice.
- Any tax implications and debt obligations you might face will be pointed out.
- And, finally, you'll be given details of the next steps you should take to plan your retirement.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
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.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.