The Pension Freedom rules introduced in 2015 opened up many new possibilities for individuals to flexibly access their pension savings. The new-found freedoms have generally been popular, although the increased choice has been accompanied by added complexity, given the increased number of options now available. As a result, getting sound advice when nearing retirement has become even more crucial, as these key planning decisions may well have an impact on the income received for the remainder of your life.
To help those reaching this crucial planning phase, the government introduced the Pension Wise service alongside the new pension freedoms. Pension Wise is a government service that offers free, impartial pensions guidance in respect of defined contribution pension options. Users of the service can access a phone or face-to-face appointment at which guidance is provided in relation to the options available, how benefits will be taxed, and how to be aware of pension scams.
Pension trustees and providers have been obliged to make individuals aware of the Pension Wise service since the introduction of the new rules. From June 1st, new legislation has been introduced which places greater emphasis on “nudging” individuals thinking about drawing or transferring flexible benefits, to seek guidance from Pension Wise. The new regulations require providers to offer to book an appointment for the member and the provider can block any action to draw benefits until an appointment has been attended or the individual opts out of the guidance process.
These new regulations do not apply to those individuals who have received regulated financial advice, as Pension Wise is designed primarily to help guide those who approach pension providers directly. Likewise, an individual is able to opt out of the Pension Wise guidance completely, although they will need to make a clear election to this effect.
Pension providers have indicated these additional steps may further slow the time taken to arrange transfers of pension benefits or lead to increased delays where individuals wish to access their pensions flexibly.
Users of Pension Wise have generally felt the service is worthwhile, although there have been criticisms levelled at the service, with some users pointing out the sessions are little more than the representative setting out generic information about each of the options that are open at retirement. This is where the limitations of Pension Wise really become apparent, as it is a guidance service only, without the ability to offer advice that is tailored to an individual’s needs and objectives.
Reaching a decision to consider retirement is perhaps the single most important point at which financial advice should be sought. At this point, decisions reached and actions taken could have implications for the next 30 years or more, and it is therefore vitally important that the advice received takes into account all aspects of an individual’s financial circumstances.
Pension Wise sessions may be helpful in providing a generic background and useful information, but if you consider the range of options provided by different pension schemes, it becomes clear that guidance is no substitute for tailored advice.
When meeting new clients for the first time, we often see the situation where a number of pensions have been accrued during their working life, and making sense of the total level of income that could be generated in retirement can be difficult. The ability to draw pensions flexibly – a key advantage of the new pension rules – is not always available through existing pension arrangements. Within some personal pensions, an internal transfer to a drawdown pension may be possible, where other pensions will require a transfer away to an alternative provider to be able to access the pension in a flexible manner.
We encounter many pensions that have enhanced benefits as a feature of the pension, which cannot be ignored. These include guaranteed annuity rates, which are often attractive, or a minimum fund value at retirement. Careful assessment of these factors is vital to ensure that a valuable benefit is not lost.
Reaching retirement is a point at which much wider financial planning, in addition to bespoke advice on pension income, is required. Whilst the focus of advice pre-retirement is generally in relation to income production, there are a number of areas that need to be considered at the same time.
Deciding how best to use tax free cash is one such example where advice needs to be tailored to wider financial circumstances. For example, an individual may have outstanding borrowing on their property, which could be paid off by the tax free cash, or the lump sum could be invested to generate additional income in a tax-efficient manner. Alternatively, parents may see this as an opportunity of being able to help the next generation and decisions need to be reached as to how best to gift assets without potential tax consequences.
Inheritance tax planning is also sometimes a consideration, in particular where pensions do not need to be drawn to provide an income. Under the freedom rules, pensions can be very effective planning tools in a wider strategy to mitigate inheritance tax.
Providing more information to those reaching retirement can only be a good thing, although Pension Wise appointments can only give guidance which is not tailored to the specific circumstances and requirements of the individual. In our experience, those nearing retirement are at a crucial point where bespoke financial planning can reap significant benefits in determining the way forward, potentially having an impact for 30 years or more. If you are approaching retirement, speak to one of our experienced financial planners to talk about the options open to you.
If you would like to discuss the above with one of our experienced financial planners, please get in touch here.
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