New changes to pension rules – a note of caution
Much has been said in the press about the changes to the pension rules that have come into effect as of 6 April 2015. It suggests that the well-trodden route whereby you are forced to purchase a fixed annuity may be a thing of the past and that you will be able to invest, or spend, your pension pot however you see fit. However, some people may not appreciate that there are many issues to take into account when considering if they could, or should, take advantage of the flexibility these new rules are intended to provide.
These new rules also have consequences for those going through a divorce where either party has a pension. It is notable that the number of people getting divorced of pensionable age has vastly increased and is set to continue to rise with the ONS estimating those over 60 getting divorced will increase by more than 40% in just over 30 years.
We have set below a few of these considerations with the warning that anyone thinking about making any changes to their pensions should take expert financial advice before doing so.
Firstly, the new rules only apply to Defined Contribution, Money Purchase Schemes and SIPP’s. They do not apply to Defined Benefit or Final Salary pensions. It is possible to transfer such pensions into Defined Contribution schemes but in doing so you could lose highly valuable benefits so careful expert advice would be needed.
The new rules only apply to those reaching the age of 55. Pension companies have been inundated with enquiries from 20 and 30 year olds asking if they can cash in their pension pots. The answer is they cannot. The rule remains that you cannot draw on your pension until you are at least aged 55.
One of the big headline changes to the rules is you will be no longer be limited to drawing only 25% of the value of the fund and could withdraw it all if you wish to. However, the rule remains that only the first 25% is tax free. Any sums above that will be taxed at the marginal rate. Therefore for many they may be paying 40% or even 45% tax on any capital above 25% that they draw down.
A further consideration is that many pension providers will charge exit penalties for the transfer of the pensions to other funds. These exit charges could be as much as 10% or more so this is a significant cost to take into account.
The above are just some of the many considerations to be made when looking at whether to take advantage of the new rules. It is extremely important for anyone considering this to take expert financial advice before doing so to fully understand whether this is indeed the best step for them to take.
If you have any queries about this article please contact jonesnickolds on 0203 405 2300 or contact@jonesnickolds.co.uk