Don’t try to go it alone. You will need guidance to explore all the options, says Jane Wallace
Many savers will be keen to access their pensions after April 6 but have no idea how to manage the money. The best move is to seek advice but this can be prohibitively expensive.
Robert Reid, director at Syndaxi financial planning, says the £2,000 to £3,000 cost for initial advice on tax and investment options could sting. “That’s a big slug of a £50,000 pension. Even at £100,000, it is still significant.”
Savers with less than £100,000 to invest may be hard-pressed to find an adviser to take them on, while others may not want to pay for advice. So what can they do?
The first port of call should be the free government service, Pension Wise, available at Citizens Advice Bureau offices, online and by phone. An adviser will be able to highlight tax liabilities and withdrawal options. These choices are likely to include an annuity purchase — trading your pension pot for a lifetime income — or going into a drawdown service; the money stays invested and you take out cash as required or allowed. You can also just take cash, called an uncrystallised funds pension lump sum (UFPLS), which may incur charges.
However, Pension Wise will not recommend products. For this, savers need an independent financial adviser (IFA) to talk to their pension provider. Or they can go it alone.
Independent financial advice
If you can afford it, this is the surest way of securing the best retirement funding. Shop around for the services you need. At Candid Financial Advice, for example, typically it costs 1 per cent of a £100,000 pot for initial advice and 0.6 per cent annually for ongoing advice. These figures reduce slightly for larger pots. On top of that, savers choosing a drawdown service would pay product and fund-management fees of 0.5 to 0.8 per cent.
At Syndaxi, advice tends to be fee-based rather than a percentage of the pot. Working out income requirements and tax costs about £2,500, depending on the number and type of pensions involved. There is a 1 per cent fee to set up the chosen investments. The fee for ongoing investment advice is £90 plus VAT and 0.75 per cent a year.
It may be worth taking advice on an annuity purchase because the alternative (commission paid to a broker) can cost the same — 1 to 3 per cent. There are no ongoing fees unless the annuity is investment-linked. Reid favours advice because annuity income can be improved by factors from your health to your postcode.
Defined benefit (final salary) pension schemes offer no new flexibility and the only way to access your cash is to move into a scheme that does. Unfortunately, financial advice in this instance is mandatory for pots worth more than £30,000 and could cost about £2,500, before any annuity or drawdown costs, says Reid. This could make some transfers unviable.
Do it yourself
If you’re going it alone, you must understand your tax position. The first 25 per cent of the pension is tax free but the rest is taxed as income. Taking the whole pot at once could trigger higher-rate tax on a good part of it, so payments need to be staggered — or you need to retire, reducing earned income.
Remember, you don’t have to take the money, and it is worth checking what your existing pension offers for withdrawals and follow-on products. If your pot is very small, you may be able to take it as cash under the “triviality” rules. Then you must decide whether you want a regular income payment or if you can cope with fluctuations in the value of your income and capital.
If you want to avoid fluctuations, the annuity route is for you, says Reid. If you can tolerate the vagaries of the markets and have time to run your portfolio, you could consider drawdown. Or you could tot up living expenses and buy an annuity to cover them. The remaining cash could be kept invested and drawn when required.
The government’s Money Advice Service offers guides to the new rules.
- Taking advice on an annuity often costs the same as going through a broker
- Pension Wise will show options but cannot recommend product