UK pension reforms: what are their potential impacts?
On Monday 6 April, new rules will come into place that will allow pensioners full access to their retirement funds. But what could this mean in practice?
From the beginning of next week, people drawing a pension will not have to take an annuity, but instead can decide how much they want to take out of their pension and when.
Hymans Robertson, a leading pensions consultancy, have suggested that up to £6bn could be released into the economy in just the first four months.
Benefits of lump sums
“There are situations where cashing in could be useful to the individual. Examples include paying off an interest only mortgage, raising cash to enable down-sizing (where bridging loans are not available) and paying for a partner's care bills," said Chris Noon, a partner at Hymans Robertson.
"This will be an appealing policy to many pensioners who feel trapped in a product they didn’t want to buy."
This additional spending could also benefit the economy in the short term; but there could be difficulties for individuals if they trade in their annuity for cash but run out of money a few years later.
"Individuals need to carefully consider giving up their annuities," Mr Noon continued. "If you are looking for a guaranteed income to last your life then an annuity is hard to beat."
Though allowing people with existing annuities to cash them out will lead to far more financial freedom, personal agency, and possibly create a new financial market for annuities, Hymans Robertson are not alone in their concerns.
Taxes could reduce potential amount
Andy James, head of retirement planning at Towry, said: “Taking the funds in full will rarely be the best option, not least from a tax point of view.
“For example, Mike has a fund of £280,000. Under the new rules he will be able to take all his funds at once, but in return he would suffer a considerable income tax charge. Mike will lose his personal allowance of £10,600, as his income for the year will be in excess of £100,000.”
“If Mike took the same fund out over a number of tax years he could keep his personal allowance, and not pay any higher or additional rate tax at all.”
Darren Laverty of Secondsight agrees, adding: “The pensions freedoms will give employees choice that they have not previously had, although greater freedom and choice can make decision making more complex.
“Many people will need help to understand the products available, the optimum way of drawing their fund, and the tax implications.”
Employers may need to offer advice
Pensions and taxes are a complex subject, and further advice may be needed to help people to make the most of these new freedoms. One way of doing this would be for employers to offer recommendations and information to their staff.
“The pensions freedoms places real emphasis on the area of financial education in the workplace, and the need to support employees with their financial futures,” said Darren Laverty.
He added: “Employers should highlight the guidance guarantee (delivered under the name Pension Wise), and they should also alert staff to services provided by the Citizens Advice Bureau and The Pensions Advisory Service.”
With all of these factors to consider, the overall impact of the pension reforms is currently difficult to determine; but such a radical change is bound to have a profound influence on the economy, for better or worse.
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