Warning over new pension freedoms
12th Jan 2015
While the freedoms associated with the new pension reforms have been widely advertised, other arrangements that could mean lawyers miss out are not as clear.
Wesleyan, a financial services provider, has warned that pension scheme providers are under no obligation to adopt the new flexibilities that the reforms offer, and that if not considered carefully, the tax implications and other arrangements could lead to losing income after retiring.
The reforms will come into effect in three months’ time, from which point it will be possible to withdraw an entire pension pot at the age of 55 for those saving into a defined contribution pension scheme. However, Wesleyan fears that some legal practitioners may fail to realise the long-term consequences of this move.
Samantha Porter, group sales and marketing manager for Wesleyan, offers her expert advice on the reforms. Stating that while the reforms will undoubtedly offer customers more choice, something which will be welcome, it is also important that lawyers continue to make the right decision, and not rush into anything. After a long and demanding career, professionals should ensure they will have enough money to enjoy their retirement the way they want to.
All options available should be discussed with a financial services specialist, Porter goes on to advise, one who understands the profession, and will be able to consider everything carefully and help take the right actions with an understanding of ‘the specific needs and challenges’ of the law profession.
Wesleyan has put together some of the key aspects they believe lawyers should understand about the reforms.
Firstly, it is important not to be tempted into taking a lump sum simply because it is assumed the best or easiest choice. While it sounds simple compared to looking around for an annuity, the greater choice accompanying the greater freedom can be complicated.
Note that not every defined contribution pension provider will be offering the new flexibilities, as it is not compulsory for everyone to reform; it is essential to look into this in case it becomes necessary to change provider. This can be a lengthy process, so starting soon is advised if lawyers want to take advantage of the new arrangements early on.
Tax restrictions may be applicable when taking out a pension pot as a lump sum of cash; while a quarter can usually be withdrawn tax-free under the new rules, the rest will be treated as income and taxed at marginal rates. This has the potential to push some lawyers into a higher-rate tax band.
Finally, consider the best option for you. Investing cash can come with risks, which is why it is important to get professional advice. On the other hand, annuities face criticism around their value, though they can provide the security of a regular income that cash and investments cannot guarantee.