Recent changes to pensions have made them more flexible than ever before. Since government and financial reforms introduced in April, many now have greater freedoms and choices regarding their pensions than ever before.
Essentially, pensioners can choose to withdraw more money from their pension pots, and at a time to suit you. Indeed, financial advisers report dealing with pensioners who want to withdraw pension money to fund purchases including Bentleys, a second home, speedboats, and children’s’ weddings, amongst other queries. Alternatively, the pension arrangements can be left as they are. Or the pensioner can you can (within limits and reason) do both.
If seeking to withdraw from your pension funds, you can draw down he funds, or use UFPLUS. If you draw down, effectively you withdraw a large amount- but leave the remaining lump sum invested. However the money is withdrawn, the first 35% is tax free, with subsequent withdrawals taxed at your marginal tax rate.
The alternative is the Uncrystallised Funds Pension Lump Sum route, or UFPLUS. With UFPLUS, your money stays invested in your pension plan, and can be taken directly out of the pension pot. Essentially, UFPLUS allows you to use your pension plan lie a bank account. Despite the apparent ease- withdrawals from the UFPLUS ‘account’ are not necessarily easy, and are taxed each time. Additionally, once you start making withdrawals using UFPLUS, the money you are allowed to pay into your pension fund annually falls from £40,000 to £10,000.
UFPLUS is recommended for those who want to make smaller but regulator withdrawals from their pension fund, below the 25% tax free limit. According to Chris Noon, a partner at actuaries Hymans Robertson, using “Ufplus to withdraw money is the best option for those paying £10,000 or less into their pension each year and paying basic rate tax… It has fee advantages – these will be lower than on drawdown – as well as tax benefits.”
Alternatively, you can use annuities, or continue to invest the whole pension fund. Recent reforms give pensioners that freedom, flexibility and more choice regarding their pensions and retirement planning.
Financial advisers have seen a record number of pensioners getting in touch, and asking such questions, as they get more choice, and power over their retirement funds. However, with such freedom and choice comes responsibility. Taking charge of your retirement finances in such a way, and setting up your pension arrangements to suit you, comes with inherent financial risks. Also, there is a risk of fraud, as people seek to take advantage of pensioners and such arrangements.
Essentially, April’s reforms gave more power to you, the pensioner. This is but one of government moves concerning pensions. Aside from the popular Pensioner Bonds, employers now have to set up and provide pension arrangements for their employees.
It is always advised to consider your pension plans early. With recent government changes, pensions are more complicated than ever, and require more thought and choice, even at a younger age. As such, government rules are forcing people to do just that. Although the reforms themselves might attract criticism from pensioners, savers, employers, financial advisers and commentators, and the financial sector, all would agree that forcing people to consider pension arrangements early is only a good thing.