Join the RevolutionPosted on: 26 March 2015 by Steve Wanless
Steve Wanless looks forward to the general election and the cost of politicking pension reform
Most revolutions are the result of decades of abuse; the majority is intimidated and kept down at heel with little hope until, finally, the injustice ignites a popular uprising to overthrow the old order.
Yet, in the aftermath of such outbursts, not all the casualties are the guilty and much of the blood spilt is not justified.
The French and Russian revolutions erupted with a genuine intent to get rid of privilege and give power to the people; the reality was somewhat different.
The “people” were soon under the cosh again – a different regime and different leaders – but the oppressed were still the oppressed.
The sceptics are predicting much the same for the Pensions Revolution, which is now less than a month away.
The new rules and regulations, announced by chancellor George Osborne in last year’s March Budget, were long overdue after successive generations had suffered under the “annuity” rule.
After a lifetime of saving, customers increasingly felt short-changed by the rewards offered by the annuity that has to be purchased by the age of 75, as rates dropped and dropped.
Not anymore. From April those with a pension pot, aged 55 or over, can dip into their savings, supposedly at will and still take a 25% tax-free lump sum and pay their marginal rate of income tax on the rest, rather than the 55% that was the previous penalty.
There is always a rush to take sides in a revolution, but, if there is one piece of expert and sensible advice amidst all the “guidance” that is being offered, it is to act slowly and carefully.
The government were originally going to provide pension “advice” re the new situation – that was soon watered down to “guidance”.
Many feel there should have been an official role for Independent Financial Advisers in these pensions’ changes. They will still play a key role as much of the government’s “guidance” will be to consult a pensions’ specialist.
How you handle your pension pot could well determine what sort of life you might lead over the next couple of decades. Someone aged 55 will be able to take the lot – a big call for someone who might be expected to live for another 30 years-plus.
Part of the Pension Revolution is that there will be less state aid. With the introduction of the new flat-rate state pension, it’s unlikely there will be any more hand-outs; you will be kicking yourself if you have frittered away a lifetime’s savings on luxury items and kept nothing back for a rainy day.
That will happen to some; but those who have shown a careful approach to their pension years during decades of work are not expected to lose the plot and start gambling with their future.
Anyway, many will find any attempt to withdraw cash from their pension scheme next month is not as simple a process as it is in a bank. Experts believe that as many as nine out of ten savers reaching retirement are in pension plans that will block members from taking advantage of the new rules when they come into force on April 6th!
That will be because their pension company is simply not geared up to offer the flexibility they are after. The choice then will be to purchase an annuity, or take the whole lot as a lump sum (the tax hit would not be as bad as previous, but still substantial) or transfer your fund to a company that will provide the access you desire.
Transferring is an option for those in a Defined Benefit Scheme, but this again needs expert and careful study. An IFA will make you aware of exactly what you are “losing” by opting out. It’s not all about money.
One of the issues with waiting to see what happens is that no-one yet knows the outcome of the General Election on May 7th – or who will govern us afterwards.
Even if you are able to withdraw cash, there is another problem. Pension firms have been told by Her Majesty’s Revenue & Customs (HMRC) to use the emergency tax regime on withdrawals.
If you take out a lump sum in April, it will be taxed as if you plan to withdraw the same amount every month, which could push you into a 40% or 45% tax rate. You will get the money back, but only at the end of the tax year when the actual amount removed from the pension is calculated.
The best argument about seeing an IFA regarding your pension pot and what to do with it is that it will keep you aware of and away from the sharks and fraudsters. The government has finally launched its www.pensionwise.gov.uk website, but there are bound to be imitations and unofficial sites attempting to scam those looking to remove cash from the pension funds.
“Scams and fraud, we know, tend to proliferate at the moment of maximum uncertainty,” was the view of Martin Wheatley, chief executive of the Financial Conduct Authority (FCA). “A particular risk, given that many of those approaching retirement today will – unlike their parents’ generation – be carrying debts with them.”
There are many in the financial industry that believe the new pension freedoms will be “an open season” for fraudsters.
Pensions minister Steve Webb, who was recently cold-called himself by fraudsters, added: “A lot of people will have access to a lot of money come April, and there’s a bunch of crooks out there.”
You have been warned!
You should seek guidance and advice before acting on any of the new pension freedoms available.
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