Investing Guide at Deep Blue Group Publications LLC: How to tap into your small pension pots
There
will be a short wait – a year, to be precise – before savers are finally able
to dip into all of their pensions for however much they require, whenever they
please.
That
dramatic relaxation of government rules, which ends the compulsion to turn a
pension fund into small monthly payments during retirement, was the highlight
of the Budget 11 days ago. The Government will now give pension providers time
to adjust their systems and practices.
However,
many of the 320,000 people preparing to retire over the next 12 months need not
delay their plans. Last Thursday a number of temporary measures were introduced
that will give pensions freedom to tens of thousands of people.
These
new rules are particularly beneficial to those with small subsidiary pensions
of less than £10,000 which were saved alongside a final salary pension. The
over-60s can now cash in up to three pensions of this size, taking a quarter of
each tax-free.
Several
other measures, detailed below, also give savers greater choice over how to use
money reserved for later years. They will enable some to clear mortgage debts
or fund activities or gifts to children that were previously thought to be out
of financial reach.
The
Budget changes also represent a call to action for workers in their 50s. Many
pension plans are designed specifically to be converted into an annuity when
the saver retires.
In
addition, the City watchdog will this summer initiate an inquiry into old pension plans and other
investments sold before the turn of the millennium, which could offer an escape
route to those trapped in high-charging policies. However, some older policies
contain perks such as guaranteed payout rates that turn each £100,000 into as
much as £11,000 a year.
David
Smith of investment firm Bestinvest said: “Don’t make a snap decision on the
back of the Budget. To get the most from your savings while paying the least
amount in, you’ll need to weigh up how much you will withdraw in retirement and
when – then adjust your investment strategy accordingly.”
In
short, now is the time for a financial spring clean: so dig out old policy
documents and follow the rough guide on this page.
The
Telegraph was inundated with pension queries in the aftermath of the Budget. We
have endeavoured to answer many of them, which will be published online
tomorrow, with the aim of providing a reference for all readers.
To
tide over savers until the pension unshackling next year, the Government has
tinkered with the existing rules.
Those
with less than £30,000 in total pension savings can take the entirety as cash,
subject to income tax at marginal rates on three quarters of the money. Previously
the limit was £18,000.
Many
will still find that a small amount of final salary benefit is enough to breach
the limits. Around £1,500 of annual income from one of these pensions, also
known as “defined benefit” schemes, is worth £30,000 in the Government’s eyes,
according to Hargreaves Lansdown.
In
2011 rules were introduced to unfetter the smallest subsidiary pensions. But
they were restrictive, allowing only two pensions of no more than £2,000 to be
taken as cash lump sums. Savers with slightly larger funds were asked to buy an
annuity paying as little as £10 a week.
On
Thursday the Government increased the limits so savers can take three pensions
worth no more than £10,000 as cash, subject to tax on three quarters of the
fund. The Treasury estimates that 32,000 people will benefit as a result.
Another
development is rules around “flexible drawdown”, where a pensioner leaves their
fund invested in the stock market or other assets and takes an income. Savers
with £12,000 a year of secure pension income from other sources (such as a
final salary or state pension) have entire freedom to access their money.
However,
this does incur charges, typically of around £300 or more, as pension providers
are loath to spend money setting up a plan only for the money to disappear
shortly afterwards.
An
estimated 150,000 people have already started the process of buying an annuity.
Last week, savers on the verge of retirement were hit by chaos across the
pensions industry, which is scrambling to adjust to the radical shake-up
announced in the Budget.
PLANS FOR 2015...
If
you can afford to wait to retire – or have other money to see you through –
leave your pension untapped until 2015.
There
are alternatives to annuities if you need the income. Most pension providers
allow customers to use “capped drawdown”. Here the pension stays invested and
income of around £7,000 can be taken from each £100,000 in a fund at age 65.
On
Thursday this cap was raised to nearly £9,000 per £100,000. The impediment to
taking this route is charges, which can be as much as £700 a year.
Some
providers, such as LV=, Just Retirement and Aviva, provide “fixed-term”
annuities. Billy Burrows of Annuity Line, the advisers, said: “At the moment
the minimum term is three years. Insurers should offer a one-year option – this
would bridge the gap until everyone had total flexibility. I think this is
bound to happen soon.”
…AND BEYOND
Savers
with more than a year to retirement must urgently check their investment
strategy. Company pension savings, in particular, are usually fed into
“lifestyle” funds. An estimated £165bn is in these funds, which are designed to
reduce risk as a customer closes in on retirement by selling shares and buying
bonds.
However,
bond prices rocketed in the wake of the financial crisis as investors sought
safe havens. Money in bond funds is on a “cliff edge” – if markets swing back
the pensions of savers five, 10 or 15 years from retirement could suffer.
Laith
Khalaf, a pensions analyst at Hargreaves Lansdown, said: “Absolutely everyone
who is invested in a default fund in their company pension scheme should dust
it off and take a close look. The fund may no longer be fit for purpose now you
don’t have to buy an annuity. This also applies to pension plans set up with
previous employers.”
Gather
together any old pensions too. The City regulator is concerned that these plans
are neglected and charges are too high. This summer it will initiate an inquiry
into pensions sold before the turn of the millennium.
Run
old policies with anachronisms in the terms and conditions under the eyes of an
expert adviser listed on Unbiased.co.uk. Look for a “chartered financial
planner”. Some antiquated policies contain valuable guarantees or “bonus”
payments that kick in at age 60 or 65. Others penalise customers for switching
to cheaper providers. Work out whether – and where – you can obtain a better
deal.
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