New pension freedoms starting today will leave many people seeking guidance on how to convert their pension savings into the best possible income during retirement.
The reforms rightly give people more control over their own pension savings, but converting your pension pot into retirement income is a complex financial decision that no-one should rush into. Which? research shows that only a quarter (24%) of people trust pension providers to act in their interest.
Which? has developed free tools and videos to support those facing the new choices, in our new pensions and retirement hub. And below we explain the key points – and the pitfalls.
What are the pension changes?
The new measures represent a complete shake-up of the UK’s pensions system, giving people much more control over their pension savings than before. Previously, many people had to get an annuity – an insurance product which gives you an income for the rest of your life in exchange for a lump sum. But now there are several different options.
Although the new rules come into effect today, you can take your time to make up your mind what to do. Even if your current pension provider doesn’t allow you to take advantage of the new freedoms, you can switch to another that will.
Will the pension changes affect me?
The most radical change is that from the age of 55, you will be allowed to access your defined contribution (DC) pension pot (the pension savings you built up over your working life). Defined contribution pensions are also known as ‘money purchase’ schemes. With these types of pension schemes, the amount you end up with when you come to retire depends on the performance the investments into which you put your retirement savings.
If you have a private final salary (also called ‘defined benefit’) scheme or a funded public final salary scheme, you will be able to use the new rules by transferring your money into a defined contribution pension. However, you could lose valuable benefits by doing this, including a guaranteed income which is linked to inflation, and you’ll need to take advice before doing so.
If you’ve already purchased an annuity, you can’t currently cash it in, although the government has proposed allowing people to do this and it may be an option in the future.
Find out more: What the pension changes mean for you – the key changes summarised
What are the main options for my pension pot?
Below are the main options available for taking money from your defined contribution fund for the first time under the new pension rules:
- flexi-access drawdown – this is the new form of ‘income drawdown’, which will allow you to take (or ‘draw down’) income from your pension fund, which remains invested
- annuity – choosing an annuity is an option. Annuities can now decrease and the upper limit for guaranteed annuities of 10 years has been removed
- all in one go or as ‘uncrystallised funds pension lump sums’ (UFPLS) – you can take all your pension, or take lump sums from ‘uncrystallised’ funds (funds not yet used to pay a scheme pension, buy an annuity or go into drawdown); 25% of the fund, or any withdrawals, will be tax-free with the remainder taxable as pension income.
You can also still take up to 25% of your pension fund as a tax-free lump sum at the outset.
Find out more: Income options under the 2015 rules – the detail of your new options
What do I need to watch out for?
With the greater flexibility in getting your hands on your pension cash comes the increased threat of scams.
Scammers are offering ‘free pension reviews’, ‘one-off pension investments’ or ‘pension reviews’ to gain your attention. However, you might then pursue ‘pension liberation’ or be persuaded to opt for a ‘unique investment opportunity’, with the upshot being that you lose your entire pension pot. If you’re cold-called and offered any of the above, it’s wise to put the phone down.
Find out more: How to avoid pension scams – keep your savings protected
Where can I get help?
As part of the changes, the government set up a scheme offering you free, impartial guidance on what to do with the money in your defined contribution scheme.
The guidance, called Pension Wise, is now available and is being delivered by independent organisations – The Pensions Advisory Service and Citizens Advice. People aged over 55 with at least one DC pension are eligible to use the new service.
Once you call the main Pension Wise number (030 0330 1001) you’ll be able to set up either a telephone consultation or a face-to-face session.
Each of the product options will have pros and cons, so you should use your Pension Wise session or visit an independent financial adviser (IFA) before you make up your mind.
Find out more: What is Pension Wise? – how it works, plus checklists of questions to ask at your session