2015 has seen significant changes to the pensions’ landscape, such as the introduction of complete flexibility on how to access their defined contribution (DC) pensions.
WEALTH at work, a leading provider of financial education in the workplace, supported by guidance and advice, has created a list of ‘Pension Resolutions’ that all those approaching retirement should consider doing.
- Your employees need to decide! For the first time most people approaching retirement are being given responsibility for how they manage their income in retirement. This is great news, but with responsibility comes risk, so make sure your employees fully understand all of their options and are armed with all the facts.
- What are your employees’ pensions worth? Don’t let your employees bury their heads in the sand – they must work out what their pensions are worth and how much income they are likely to have in retirement.
- How much income do they need and want? Your employees need to work out how much income they are going to need in retirement. This is made up of two elements; essential income to meet your employees day to day living expenses (including household bills) and discretionary income for holidays, hobbies etc. Do these match the answers to Question 2, or do they need to consider working a little longer, or do they need to reassess their expectations?
- Income drawdown or annuity – which is right for them? Income drawdown is no longer the preserve of the wealthy. This means that instead of having to buy an annuity your employees can choose how and when they access their pension. Annuities will still be the right choice for some; particularly those that are risk averse so they should ideally get advice when deciding.
- Employees may want to work out how long they are likely to be retired Research has found that most people live longer than they expect they will, so when your employees are working out how much they will need in retirement for the rest of their lives, this is something to keep in mind.
- Will your employees pay unnecessary tax? If they do go down the income drawdown route, employees need to think carefully about how they do this to help them avoid paying any unnecessary tax. It is possible to withdraw 25% of their pension in a tax free lump sum and money withdrawn from the remaining 75% is taxed as earned income. However, it is possible to withdraw smaller amounts. In other words, they should not have to take out all of their tax free cash in one go. Depending on their circumstances, unless it’s required for something specific such as paying off the mortgage, why withdraw it just to invest it elsewhere and then possibly pay tax on it? – They could consider leaving it in the pension where it has the potential to grow tax free and withdraw it as and when they need it (although they do need to be aware that if money remains invested it is subject to market risk).
- Your employees should make sure their beneficiary details on their pension are up to date In 2015, the Chancellor abolished tax on death on DC pensions for anyone who dies before the age of 75. This means that any remaining pension can pass onto beneficiaries tax free, subject to not exceeding the lifetime allowance limit, and providing the employer pays out within 2 years of date of death. Even if individuals die after age 75, their beneficiaries will pay tax only at their marginal tax (45% if taken as a lump sum before 6 April 2016) on the money they receive from the employee pension whatever age they happen to be!
- Your employees must work out what income they could have from other assets If your employees have ISAs, shares, deposit accounts, or any other assets, they should look at these as other potential forms of income in retirement. For example, they may be better off taking a smaller amount each year from their pension and top it up with income from their ISAs as ISA income is paid tax free.
- Advice can be cheaper than no advice and give your employees added consumer protection Many employees are concerned about the cost of advice without realising that when they buy retirement products such as annuities, through for example online brokers, they are paying commission which can cost just as much, if not more, than getting advice. The DIY approach could be fine if they know what they are doing and what options are best for them, but remember advice can be money well spent if it helps them make the right choices and they also have the benefit of added consumer protection for the advice given.
- If your employees are eligible, they could consider buying extra state pension Women born before April 6, 1953 and men before April 6, 1951 have an opportunity to top up their state pension by up to £25 per week. Details can be found at: gov.uk/state-pension-topup