GuardianWe recently contributed to an article in the Guardian newspaper, giving our thoughts on what ‘Shelia,’ a fictional pensioner, should do with her £80,000 pension pot.

You can read our comments, along with those of the other contributors, by clicking here.

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The article was of course interesting; with all the contributors suggesting ‘Sheila’ did something slightly different. But, what was really fascinating were the comments at the end of the article, which were the usual mix of informed opinion, speculation and dare we say it mistakes.

We’ve taken some of the more interesting comments and added our thoughts, we hope you find this as interesting as we did.

“The Pension Policy Institute website says that there are 420,000 new potential annuitants each year……the average fund is £21,000.”

This reader makes an important point; the value of the average pension pot is astonishingly small and certainly not enough to live on.

A pension pot of £21,000 would provide an income on the region of £1,000 per year and that’s before tax!

With the State Pension Age moving farther away, making your own provision for retirement has never been more important and£21,000 to last for 10, 20 or ever 30 years, just isn’t enough.

“Is there no way that Sheila can take out £54,000 this year (£20,000 tax-free, £34,000 taxed at 20%) and £26,000 next year (£4,000 tax-free, £22,000 taxed at 20%) which reduces the tax blow by £4,800, and lets her daughter start this year with an 80% LTV mortgage, and next year make a big capital repayment and reduce the term.”

This comment highlights a number of important points relating to the proposed changes to the ways you will be able access your pension:

  • Firstly, it’s important to remember that these are only proposals at the moment and there could be significant change before they become ‘rules’
  • Next, the press has been full of stories about pensioners taking large lump sums from their pension pot, but there has been less coverage that any money taken, above the 25% tax-free lump sum, will be added to existing income and then subject to tax
  • Pensioners who decide to take their pot as one lump sum and don’t understand the new rules could therefore be hit with a large and unexpected tax bill
  • Before taking the pot as a lump sum you need to think carefully about whether you will leave yourself with enough income to meet your outgoings. Not just now, but also in the future, when inflation starts to eat away at your income

Unless you have a very small pension pot, taking the whole fund as a lump sum will needs careful thought.

“I didn’t think the new rules about withdrawal required you to withdraw as a single shot.”

As we’ve already said, you don’t, which means you can take money out as you need it.

As a general rule, the longer you can leave your pension untouched, the technical term for this is ‘unvested’, the better. Not only will you be invested in a tax-efficient way, your dependents or beneficiaries will receive the entire pot as a tax-free lump sum if you die before the age of 75.

“PS….George Osborne’s budget bombshell, in which he freed pensioners from having to buy an annuity….Sigh. It hasn’t been compulsory for years”

This is true. One of the many myths about retirement planning is that it is still compulsory to buy an Annuity from age 75, when in fact the requirement was abolished some years ago.

However, despite this earlier rule change most people have continued to use an Annuity to turn their pension pot into an income. This is partly down to apathy as well as a lack of viable alternatives, especially for people with a small pension pot.

We hope that as a result of these latest changes, insurers will develop new and innovative products, giving pensioners a wider range of choices to turn their pension pot into an income.

“Sheila will not lose the whole of her husband’s pension if he dies. If they are still married at that point she should still get 50 per cent of his payment.”

Perhaps, but then again perhaps not.

If you choose to use an Annuity, you will be asked when you take it out, whether you want to include a spouse’s pension and if so at what level, usually 100%, two thirds or half of the starting level of income. It is this decision which dictates how much income ‘Shelia’ will get if her husband dies before she does.

If you decide to use an Annuity, remember that once you have decided whether or not to include a spouse’s pension, the decision can never be changed; so think carefully!

If you have used Income Drawdown your spouse will have three choices if they die before they do:

1. To take the pension pot as a lump sum less tax at a rate of 55%
2. To continue with the Income Drawdown plan
3. To select an alternative retirement income option, such as an Annuity, Fixed Term Annuity etc

It really isn’t as simple as the Guardian reader suggests, but then again, when have pensions ever been simple?

Are you affected by any of the issues raised in this article?

Our team of advisers is here to help.

We are experienced in developing retirement income strategies for clients the length and breadth of the UK.

If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk

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