Skandia UK - Increase your flexibility in retirement

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Pension legislation is always on the move and keeping up to date with the latest changes could open up new opportunities for you in retirement.

Faced daily on TV with the twin terrors of euro meltdown and the state of the UK economy, the easiest response is to pull the blankets back over your head, hunker down and wait out the financial storm.

Pitching the idea that now’s the time to think seriously about your pension savings may seem a little unrealistic. But hang on. In amongst all the doom and gloom there are still long-term pension planning opportunities that you could benefit from, regardless of the amount you have already saved.

In April 2011, some of the most significant changes in pension legislation for five years were announced. Many of these changes were designed to limit what the government clearly sees as over-generous tax-relief concessions. But others have created the very appealing prospect, for people aged 55 or more, of gaining much more control over when and how they can use their retirement saving.

As a consequence of calls for more flexibility, for example, the government has done away with the ‘age 75’ rule that effectively obliged anyone with private pension savings to use them to buy an annuity at that age. This change means that you can now, if you wish, leave your pension invested for longer. And if you want to take an income from it at the same time (known in pension jargon as ‘drawdown’), the ways in which you can do this have also been made more flexible.

This change means that you can now, if you wish, leave your pension invested for longer

For example, under the new rules, if you meet certain eligibility criteria, you can now take as much as you want from your pension, without the maximum income restrictions that apply to conventional drawdown arrangements. That’s right. You could even take your entire pension pot in one go – although the income tax to be paid may well deter you!

To be eligible for this facility – known as ‘flexible drawdown’ – you have to show that you already have “secure pension income” of £20,000.

Whilst for many people, buying an annuity is likely to remain the most appropriate method of accessing their pension income, some will want to take advantage of these enhanced drawdown facilities. If you are among them it could open up new tax planning avenues for you and your financial adviser.

Flexible drawdown

Flexible drawdown could for example be used to meet one-off large expenditure items as they arise or to optimise your tax liabilities. It can be a way to pass money through the generations, either by ‘gifting’ regular payments, for example into trusts, or as pension contributions to children using ‘normal expenditure’ rules so as to help avoid inheritance tax. In moving money out of your pension fund before you die you will be paying income tax on such payments but at a rate that is lower than the hefty 55% tax charge payable on a lump sum payment from your pension fund when you die.

Another age-restricted benefit where the rules have been eased is the opportunity to take tax-free cash – typically a quarter of your pension pot – when you first start to take your pension benefits. Until April 2011, if you hadn’t taken your tax-free cash by age 75, you lost the chance to do so. Now that restriction is removed too.

Depending on your circumstances, all these changes may well sound like good news, but there’s one important thing to be aware of. Just because the rules about when and how you take pension benefits have changed, it doesn’t mean your pension contract will have changed as well.

If the terms of your contract have not been updated to reflect the new legislation, you could find that you can’t take advantage of them. You could still find yourself obliged to buy an annuity at age 75. And if you haven’t taken your tax-free lump-sum at that age, you could still lose the opportunity to do so.

To make sure you can benefit from the new rules, you may need to transfer your pension savings to a provider who is offering these more flexible options. You can do this even if you are already taking drawdown income. Your financial adviser will be able to explain the pros and cons of such a decision.

To make sure you can benefit from the new rules, you may need to transfer your pension savings to a provider who is offering these more flexible options

They will also be able to review other important aspects of your pension arrangements and identify ways in which you can avoid paying too much tax. Did you know for example that, if you have already taken tax-free cash from your fund but not yet taken any income from it, the tax that applies to the remainder of your pension if paid as a lump sum when you die – at any age – is now 55%? It used to be limited to 35% for pension holders dying before the age of 75, with up to 82% applicable on death after this age. The April 2011 rules means that a standard rate now applies whatever the age at death.

The rules about pensions are typically so complicated that most people find them too daunting to engage with. But as this article shows, they can sometimes offer positive advantages. One of the most important actions you can take to discover whether you stand to benefit is to get professional financial advice.

And remember, that however bleak the current economic climate may appear, pensions are for the long term, and relatively simple adjustments made now could make a huge difference to the options available to you in the future.