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Do you know your pension options?

The changes announced in the 2014 Budget have revolutionised the pensions market. Those approaching retirement will soon have more choice about how to spend their pot than ever before, but it seems that a lot of people are still largely unaware of the options open to them.

According to research from Just Retirement, only 30% of those approaching retirement have a "good" or "full" understanding of the implications of the reforms. And, even though a large proportion claim to be "fairly" (47.5%) or "completely" (28%) aware of their options at retirement, further analysis suggests that this may not be the case at all.

In fact, the research highlighted widespread misunderstanding of the options available – so even if pre-retirees think they know the options, chances are they probably don't.

For example, 23.9% of consumers said they weren't certain about what options they'd have when accessing their pension funds, with this uncertainty rising as pension pots got smaller (29.6% of those with a pot of £20K or less were uncertain about their options).

However, the key finding was that, while most respondents were generally aware of the ability to take a lump sum and the concept of using an annuity to generate an income, many were completely unaware that alternative solutions existed or that they could shop around to get a better annuity rate.

It's a worrying trend, particularly given the new flexibilities being offered. If people aren't unaware of the options, they could well end up locked in a solution that isn't right for their circumstances, or even worse, they could spend their pot without considering the longevity risk.

So, do you know your pension options? It's a bit of a minefield out there so it's no wonder that confusion reigns, but we want to help. Here are a few key things you need to know about the pension reforms and your options at retirement:

  • The rules have changed and the tax implications relaxed, so there's no longer the obligation to purchase an annuity. Unless you want to, of course.
  • You'll be able to access your pension pot however you wish – you can draw the funds down over time (income drawdown), withdraw the full amount as a lump sum, or can still opt for the guaranteed income of an annuity.
  • Taking a lump sum means you'll still have access to the first 25% of your pot tax-free, while the remainder will be taxed at a nominal rate, typically 20% (rather than the current 55%).
  • Or, of you're opting for income drawdown, you can benefit from an increased limit from 120% to 150% of an equivalent annuity, while flexible drawdown will be available if you've got a secure income of £12,000 (instead of the current £20,000).

While the majority of the changes won't come into effect until April next year, some of them have already taken place. For example, if you've got total pension savings of less than £30,000, you can now take it as a lump sum, or if you've got a defined contribution pension smaller than £10,000, you can draw that as a lump sum, too.

There's a lot to think about and we can't possibly cover everything here, so the key thing will always be to speak to the professionals. It isn't a decision to be taken lightly, particularly with retirements becoming longer. You need to know how to maximise your pension pot to give you a viable income stream for 10, 20 or even 30+ years, because there'd be nothing worse than running out.

That's why a lot of people still opt for the guarantee of an annuity, but even if you're leaning that way, you need to compare the options. Don't automatically sign up to the annuity offered by your pension provider – the open market is full of options and you could well find a better rate, so it's vital to consider the alternatives.

It's all about having the knowledge you need, so make sure you contact the relevant professionals. The Government is making this easier by offering a guaranteed retirement guidance service, again due to come into effect next year, but in the meantime our annuity service could be a great port of call to help you consider your options.

Source:  Moneyfacts.co.uk

Sam: 14th Aug 2014 15:54:00

 

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