Pension Reforms: Facts and Implications

The way in which people can access their defined contribution pension is changing drastically from April 2015. Retirees which are due to take their pension between now and then may consider waiting if they want to take advantage of the new reforms.

From April 6 onwards, you will be able to withdraw money from your defined contribution pension in the same way as you can with a bank account (that is, there is no limit on the amount you can withdraw). This will affect millions of people reaching retirement age. You will no longer be required to purchase an annuity which guarantees a steady income for the rest of your life.

Up to 200,000 people are expected to take advantage of the new rules and cash in their entire pension pot in one go, according to research commissioned by independent financial adviser Hargreaves Lansdown. The government says that the reform will give retirees more flexibility to do what they want with their pension savings, but Labour says this policy has the potential to be "reckless". It is important to avoid these pitfalls to ensure you have a sufficient retirement income to last you for the rest of your life.

1. Don’t “Blow” Your Savings

As you move into retirement, it’s important to enjoy yourself after a lifetime of hard work. Now that it is possible to withdraw your entire pension pot at once, you may start thinking of it as a nice lump sum to treat yourself with. Perhaps you’d like an expensive holiday or new car. You deserve to treat yourself but remember that you saved that money for retirement and if you spend it now, you have nothing to fall back on in the future. The new flat-rate state pension will provide just over £7,000. This is much lower than a vast majority of people are used to, so remember that when you are planning to spend your personal income on anything too luxurious.

2. Shocking Tax Bill

This new plan allows people to unlock their pensions completely, but they are not free from tax implications. While you are entitled to 25% tax free, if you withdraw too much at once, you are subject to tax levies. As your pension is viewed as income, anyone taking a large amount in one go might find themselves getting taxed at 40% on some of it. To avoid this, retirees might decide to take it out in small chunks over the years or to stick with an annuity.

3. Investment Scams

Unfortunately, retired people are subject to a lot of investment scam. As people are deciding how best to invest their savings, con artists see an opportunity to take advantage of this lucrative market. Now that many people will be withdrawing a huge lump sum, this will only increase. Make sure you stay alert to any deal that looks too good to be true and seek professional advice before making any hasty decisions.

4. Remaining Annuity Deals may be Less Generous

Millions of people in the UK are being signed up to defined contribution pensions through workplace pension schemes. It is not known at this stage whether the changes will result in better or worse rates for those who do decide to choose an annuity. Less demand for the service may mean that insurance companies aren’t able to offer such good rates. On the other hand, fewer customers may result in annuity providers having to become more competitive. Make sure that you keep an eye on rates over the coming months to make sure that you get the best deal possible.

5. Miss-Selling Threat Increases

A large proportion of people in the UK will save for retirement in a pension organised by an insurance company. This company will more than likely attempt to encourage you to buy one of their services once you reach retirement. Although there is nothing strictly wrong with that, they may not be giving you all the details you require to know if it’s a good deal. As lots of financial firms will be attempting to get hold of your money, sales advisors will begin to overstate what is offered. Fortunately, the sector is regulated, meaning individuals have the opportunity to win compensation if they are miss-sold a product. The government is also making it a requirement that retirees receive some guidance from their pension company.

The new reforms in pensions will have a huge impact. It is not known yet if this will be positive or negative. It is important to stay wary of any scams and to be sensible with your savings. If you do not feel confident with your financial planning skills, make sure you seek some independent financial advice.

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