Financial advice must be taken by savers wanting to transfer their defined benefit pension to a more flexible plan, where the pension is worth at least £30,000. However, some providers may still require that the transfer is advised, regardless of the value, before they will accept the funds. It is possible that any plans including certain protected benefits may also require savers to take financial advice, pending the outcome of a consultation taking place at the moment.
Using the new freedoms
New flexibilities have been applied across the pension income options, but the individual features are likely to lead to more savers considering a combination of solutions throughout retirement, or taking a new approach as to how they use their pension.
Punitive income tax charges will prompt many savers to avoid full withdrawals on all but the smallest funds. Instead they are likely to prefer spreading out their withdrawals across multiple tax years in order to minimise taxation. Monies earmarked for payment can be held in liquid assets and the remainder of the fund can continue to be invested, offering the opportunity for growth before further withdrawals are required. If large amounts are required – to repay debts for example – divesting alternative investments to pensions may be preferable.
The age-75 cliff edge offers a tactical opportunity for savers to consider who will benefit most from inheriting any unused pension funds on death. Up to age 75 no individual beneficiary will be taxed, leaving an open choice for the saver. However, savers approaching this age can choose to change their nominated beneficiaries to those who are likely to pay less tax on any money they take out.
This process can be repeated down the generations, assisting savers who are looking to manage the inheritance tax bill that could arise on their death.
However, the new pensions tax freedom does not remove the need for further benefit protection in certain circumstances. For example, spousal bypass trusts will retain a useful role to ensure that the saver keeps full control over the choice of beneficiaries after their death. Savers who have remarried may wish for their spouse to receive payments from the fund (which is permissible provided the Bypass Trust’s appointed trustees are in agreement) but also wish to ensure that the fund is paid to their children, thus preventing the spouse from redistributing the fund elsewhere.
How can Sipps benefit in the new pensions world?
Sipps have always provided the most bespoke solution for an individual. They suit those who want to take control of their pension assets, manage their tax position and who want to look beyond the limited range of traditional investments usually available in pensions.
