How is your pension shaping up?

http://www.theguardian.com/money/2015/feb/21/how-is-your-pension-shaping-up

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There are growing fears that pensioners will not have enough information about their options at retirement when radical rules come into effect from 6 April – plus further concerns about a potential new wave of mis-selling. The changes will give savers access their retirement pots from the age of 55. 

This month the government unveiled its Pension Wise website to help retirees through the maze of options available under the reforms. Savers will also be able to register for one-to-one guidance session with Citizens Advice. 

However a pilot scheme run by pension firm Royal London, giving savers access to Pension Wise advisers, suggests that take-up will be disappointing. Royal London’s chief executive Phil Loney said: “I fear that many will make the wrong, often irrecoverable decisions about their retirement and this will result in some very poor outcomes.”

So what do you need to know about the reforms? In the second of three special “bootcamps” we ask our panel of experts to tackle more questions from readers. This week we have spoken to readers in their 50s, some with larger defined contribution savings and others with smaller final-salary pots. 

The savvy software specialist

Gerard Crummay, 53, and his wife Frances, 52, from Fleet in Hampshire, are hoping to stop working at 60 with a joint retirement income of £50,000. They have more than £400,000 in Sipps, plus some final-salary pensions. They want to know: 

• How easy is it to take the tax-free lump sum?

• Is it worth saving into Isas or should they divert all their funds into pensions?

Hitting a pension of £50,000 at age 60 is quite possible. Gerard, who works as a software developer, has more than £350,000 in his Sipp and £13,000 in his defined contribution scheme, and is putting in a further £16,000 a year. Frances, who works as an IT director, has a smaller pot of savings totalling £114,000, but is putting aside an extra £25,000 a year. She also has a final salary-style pension from her past roles in the public sector, worth £11,800 a year at age 60. 

Our experts suggest Frances could expect to have a fund at retirement worth £325,000 which might pay her about £16,200 a year. Gerard could expect to have a pension fund of £500,000, from which he could generate an income of around £25,000 a year. Add the state pension of £8,000 each and they easily hit their £50,000 target. 

Drawing it down to minimise tax is top of their minds. Tom McPhail, head of pensions research at Hargreaves Lansdown, says the couple can take a tax-free 25% of their pension fund upfront, in one go or in stages. For example they could move £50,000 from their £400,000 Sipps into income drawdown, from which they could then take £12,500 tax-free – leaving the balance invested and with the option of taking more tax-free lump sums later. 

He continues: “The following year they could do the same again, progressively moving the entire pot across into drawdown. In this example, after eight years £400,000 would have been moved into drawdown, paying out eight lots of £12,500 giving a total of £100,000. This assumes no investment growth. After eight years any future income withdrawals would be taxable.”

When it comes to Isas or pensions Andy James,  at wealth manager Towry, argues  the couple are better off maximising their contributions into their pensions to benefit from tax relief at their marginal tax rate. He says: “Certainly the tax relief on pension contributions has always given pensions the edge over Isas. This is because you get an initial boost in your investment amount via the tax relief, which then means that future growth is on a higher initial sum for a like-for-like net investment.” 

The nurse

Sandra Jones, 54, from Blackpool, expects to carry on working into retirement to support her income. She contributes £170 a month into her pension and can claim her NHS final-salary pension of £5,429 a year from the age of 60. At this point she hopes to reduce her hours but carry on working until the age of 66. She wants to know:

• How will the reforms affect me? 

• How will I be able to retire on my current salary of £22,285? 

• Should I make additional contributions into the scheme? 

Public sector workers with final salary-based pension schemes are largely outside the scope of the new pension freedoms, so cannot opt to use their pension as a bank account. But few will be upset as the benefits from a final salary scheme far outweigh the sort of pension income that most private sector employees will obtain from their schemes. 

If public sector workers opt to access all the cash in their scheme they have to transfer it before the end of the current tax year, 6 April 2015, as after that transfers from unfunded public sector schemes will be banned. Basically, the government does not want to cough up the huge upfront sums of money that would result from a flood of transfer requests. Apart from accessing the cash, a transfer from a public sector scheme would enable you to leave it to your heirs should you die before your 75th birthday, says David Smith of financial planner Tilney Bestinvest. 

He says: “Your children would inherit the full value of your pension plan, tax-free, if you were to die prior to your 75th birthday. If you were to die after that your children could still inherit the remaining value of your pension fund, but any income withdrawn from the pension would be subject to income tax at their respective income tax rates.

“However, the transfer would result in you potentially receiving a significantly lower pension from your 60th birthday, and this could impact upon your stated intention of retiring from your 60th birthday. Based on your current circumstances and objectives, it is likely to be more beneficial for you to remain a member of the NHS scheme.”

Patrick Connolly, a chartered financial planner at adviser Chase de Vere, agrees that transferring out is not a good idea. “In theory it would be possible to transfer out until 31 March. However, due to timescales for processing, it could still prove difficult to implement it in time even if they acted now.”

He argues that Jones’s current pension provides valuable benefits and guarantees that will be very difficult and expensive to replicate with a personal pension. “So while you don’t get the extra flexibility, you do have a very good quality pension,” he says.

Jones also has around £29,000 in a Nutmeg Investment Isa and £62,000 in other savings. She is mortgage-free on her home, worth £140,000. 

Connolly advises transferring some of her Isa and savings into a Sipp to benefit from tax relief and the tax-free cash. 

“When you do, look to take these pension benefits, ideally not until age 66, and you can decide to boost your NHS pension income by buying a lifetime annuity or, if you’re happy to take more risk, use the new flexibilities which mean you can access your pension money however you want.”

The cash-strapped parent

Charles Cousins, 58, a self-employed lorry driver from Derby, has two children who are both in their 20s and are hoping to buy a home. He has built up a personal pension pot of around £100,000. He wants to know:

• Can I use the new pension rules to help my children with a deposit? 

• When will I be able to retire? 

• Should I keep paying money into my pension?

Tom McPhail at Hargreaves Lansdown says that because Cousins is 58 – above the 55-year-old threshold for the new pension freedoms – he will be free to take 25% of his pension pot (worth £25,000) without any tax liability and pass that money on to his children to help them get on in life, even if he continues working and earning an income as a lorry driver. 

“But if he takes more than this out, he will incur an immediate tax charge. For example, if he took out an extra £10,000 on top, that would probably keep him just in the basic-rate tax bracket so he’d only have to pay £2,000 in tax – but any more than that and he’d end up paying 40% tax on some of the money.”

Cousins currently earns between £25,000 and around £33,000 a year, depending on how much work he can secure. He currently saves £150 a month into his pension.

McPhail adds: “He should ask himself whether he can afford to take out a large lump sum. He’s on track to receive a pension of around £7,100 a year which, when added to a basic state pension of around £8,000 a year, should leave him at least adequately provided for when he reaches retirement. However, if he were to take out £25,000 now, his projected pension at age 66 would fall to around £5,600 a year.”

He warns that Cousins needs to decide whether he can afford to take this kind of a hit to his retirement income in order to help his two sons. He says: “It may be that in time they’ll be able to pay him back or to support him if necessary, but if he is going to give them this kind of help I think it is important they all understand the longer-term implications and costs.”