Thursday, 18 September 2014

Pension Planning Update

On Budget Day, the Chancellor announced that, from April 2015, ‘pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any-time they want. No caps. No draw-down limits. No one will have to buy an annuity.’ 

So far, so good, but in some cases pension savers will need to take care to protect their new-found right not to buy an annuity. For example, some pension plans provide that, if the plan holder does not give alternative instructions by a fixed date (usually the default retirement date specified in the pension plan documentation), his or her savings will automatically be used to buy an annuity. Cases have been reported of companies ignoring telephone conversations with plan holders and then, citing the lack of written instructions, using their money to buy unwanted annuities. There is a 30-day ‘cooling off’ period, but after that it can be difficult or impossible to unscramble the situation, so we would recommend all pension savers to check what their plans actually say.

Another point is that although pensioners will by statute be given ‘complete freedom to draw down as much or as little of their pension pot as they want, any-time they want’, individual pension plan providers will not be required to provide this facility (on the grounds that they may find it expensive and burdensome to set up the necessary systems to do so). So if your existing pension plan provider is unwilling to offer ‘flexible draw-down’, you will have to transfer your funds to one that will. No doubt a charge will be levied. And it appears that the transfer will have to be made before you reach the normal retirement age set by your existing scheme.

Final details of the new regime will not be available for another few months, but once they are, most people should probably be reviewing their pension planning arrangements.

Increasing your National Insurance Retirement Pension

It is possible to defer your State Pension, and in return receive a higher pension later. At present, the rule is that for every five weeks you defer your pension, it will increase by one per cent. After one year, the pension will have increased by ten per cent, and after five years, by just over 50 per cent.

The State Pension is index-linked, so if you defer now, in 2019 you will receive 152% of whatever the pension is for that year (including any entitlement you have under the State Second Pension, SERPS or Graduated Pension schemes), and so on in future years.

Especially considering the promise of index-linking, there is an argument for deferring if you can afford to do so, even if this means dipping into capital to pay living expenses in the meantime.

Last month some newspapers reported that the rate of increase is to be halved, with effect from April 2016. However, this was itself only half true. In fact, the rate of accrual is to be reduced from one per cent every five weeks, to one per cent every nine weeks, but only for those who reach State Pension age on or after 6 April 2016 - this means men born on or after 6 April 1951 and women born on or after 6 April 1953. Anyone born before those dates will continue to qualify for the ‘one per cent every five weeks’ rate of accrual, even after April 2016.

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