An appointment with Pension Wise: Part 2

Sep 1

As part of my #PensionAdventure, I took up my free Pension Wise appointment. In Part 1, I looked at where to find it and how to use it. This time: what they told me.

(I should confess – I didn’t let on I was a pensions copywriter – I pretended to be someone who doesn’t know much about pensions. I find it’s a good way to learn things!)

The options: a reminder

1. Leave your pot untouched – you don’t have to retire just because you’ve got to 65 or whatever. There’s nothing to stop you building up more savings if you want to.

2. Guaranteed income – you buy a policy known as an ‘annuity’ - for life, or for a fixed period of time.

3. Adjustable income – invest your money and take out as much or as little as you want.

4. Cash in chunks. Each time you take cash, a quarter of it will be tax-free.

5. Cash in your whole pension pot – again, a quarter will be tax free.

6. Or you can mix two or more of these options.

More about … guaranteed income

Guaranteed income really is for life. It’s the only option that is.

Your income is paid from a policy known as an ‘annuity’, which you buy from a private provider (such as an insurance company). You don’t have to get your annuity from your current provider. You can get it from any provider that offers annuities (known as the ‘open market option’). In fact you might get a better rate from another provider. The annuity rate is how much yearly income the provider will pay you in return for the money in your pension pot.

You can take up to a quarter of your pension pot as tax-free cash before you buy your annuity. You don’t have to use your whole pension pot up to buy your annuity. And if you’ve got more than one pension pot, you can put them together first.

There’s lots of choice, but no standardisation. Different providers can offer whatever kind of annuities they like.

You can get an annuity that increases. You may get a choice of increases, depending on what the provider offers.
Or, you can get a level annuity that gives you a higher starting income, but never increases (this might be useful if you’ve got other income that increases).
Most annuities stop when you die, but you can get some that pay income to your husband, wife or partner for the rest of their life, if you die before them. But this makes your income smaller.
Some annuities come with a guarantee period – five years, for example. Payments will continue until the end of the guarantee period, even if you die in the meantime. (Again, this makes your income smaller.)
If you’re a smoker or have a health condition that could shorten your life, you might qualify for a higher impaired life annuity.

The adviser took care to stress that annuities aren’t reversible. Once you start to get the income you can’t change it – so it’s important to get it right.

But, you can also get fixed-term annuities that pay income for a number of years and may even give you money back at the end. So you’re not tied to it for the rest of your life.

More about … adjustable income

Also known as ‘income drawdown’. To do this, you put your pension savings into a plan called a flexible access drawdown arrangement. Again, you can take up to a quarter of your pot as tax-free cash.

Adjustable income isn’t guaranteed and puts all the responsibility on you for making it last the rest of your life.
You have to decide how to invest the money to try and keep it growing while you’re taking money out. Investment isn’t guaranteed, either.
And there’s always the risk you could run out of money during your retirement.

The adviser suggested taking financial advice if you’re thinking about adjustable income. I’ve written that myself, any number of times.

More about … cash

You can take your cash in chunks, as and when. A quarter of each chunk is tax-free. Some providers may have a minimum amount you have to take. The rest of your money stays invested, and you’ll continue to pay charges.

Or, you can cash in your whole pot. Again, a quarter is tax-free and the rest is liable for income tax.

This sounds like a way to use up all your money and pay a lot of tax. But, the adviser also suggested that sometimes, taking cash can be a tax-efficient way to use up a small pot. It depends on what other income you have in the tax year.

Drawdown vs cash – what’s the difference?

At this point I proceeded to play ‘Bear of Little Brain’. To a non-expert, drawdown and taking cash could sound very similar. So I asked: what’s the difference?

The adviser explained it like this.

Drawdown: you have to move your money into a special new plan (with your current provider or another provider). You decide how much income you want to take and when. And, once you’ve put your savings into drawdown, you can’t pay any more in. (I didn’t know that!)
Cash: you don’t have to move your money anywhere, you just ask your provider for cash. It’s not intended to be a regular income. You can take cash and carry on paying into your pension savings (although this reduces the amount of tax relief you get – more on this under ‘Tax – while you’re saving for a pension’).

The thing they have in common is neither of them guarantee you an income for the rest of your life.

Mix and match

If you have several pension pots you could choose a different option for each one. For example, cash one in, use one to buy an annuity and put one into drawdown.

Or, you could take different options at different times. For example, start by doing drawdown and buy an annuity later.

Tax – while you’re saving for a pension

You get tax relief from paying into a pension up to your relevant earnings (that’s all your earnings that are taxable) for the tax year (a tax year is 6 April to 5 April the following year). The total you and your employer can pay into your pension is called the annual allowance and it’s £40,000 a year.

But, once you take a taxable payment from your pension savings – cash or drawdown – the annual allowance falls to £4,000 a year (that’s contributions from you and your employer). This lower allowance is called the money purchase annual allowance.

Tax – when you take your income

Tax-free cash is always honoured, up to a quarter of your savings. But you don’t have to take it.

Retirement income is all potentially taxable, including your State Pension. Each tax year you have to work out what your taxable income is for the year.

Transferring

You can move your pension pot out of your current provider to another one – for example, if your current provider doesn’t offer the options you want, or you want to bring all your pension pots together. But before you do this, you should check whether your existing pension has anything you’d lose by transferring out. This can include things like:

guaranteed annuity rate – this means your provider offers you a favourable rate for turning your pension savings into guaranteed income
guaranteed minimum pension – this means your provider has to pay you a certain level of pension (it’s actually a lot more complicated than that and there may be a whole other blog post …)

If you want to transfer a pension you need to be able to put it somewhere – so you need to choose your receiving plan in advance. You could start a personal pension. There might be more choice of investments or the option to switch investments.

The adviser pointed out you don’t have to pay tax if you move money around by transferring pensions. You’re only liable for tax at the point you take the money as income.

Pension scams

The adviser took care to stress there are a lot of pension scammers about. Phone cold-calling about pensions is illegal and if you get one, you can report it to the Information Commissioner’s Office (ICO).

Offers of free financial advice are also likely to be scams. Financial advice is a professional service and unlikely to be free.

They said someone trying to rush or hurry you into a decision, or presenting a ‘special offer’ you have to sign up to by a deadline, is also likely to be a scammer.

Useful stuff you can find online

MoneyHelper has a guaranteed income comparison calculator. It’s confidential and you can put in the amounts of your pots and see real-time rates from a range of well-known providers. It gives the providers’ names and you can approach them directly to buy an annuity (though some will only work through a financial adviser).

MoneyHelper also has an adjustable income estimator that works out roughly how long your pension pot could last, and a budget planner.

Financial advice

There are different types of financial advice. ‘Restricted’ means the adviser is only allowed to give advice about a limited range of products. ‘Whole of market’ means they can advise you on anything.

Also, did you know you can take money out of your pension savings to spend on financial advice? You can take out £500 in a tax year, for three years (so, £1,500 in total) and it’s tax-free as long as you spend it on financial advice.

MoneyHelper has a guide to choosing a financial adviser and a ‘Find a retirement adviser’ directory.

So, Pension Wise … would I recommend it?

Definitely! I thought I knew quite a lot about pensions, but I learned some things I didn’t know.

Remember, if you’re over 50 you can have a free consultation with an adviser for guidance about your pension options. And if you don’t qualify for an appointment yet, there’s still lots of useful info on the Pension Wise website. #LoveYourPension #PensionAdventure

Felicity Morgan