Finance: pensionn advice

A Generic Photo of a man with his piggy bank, preparing for Pensions Freedoms,  Picture credit should read: PA Photo/thinkstockphotos. WARNING: This picture must only be used to accompany PA Feature FINANCE Freedom Day.
A Generic Photo of a man with his piggy bank, preparing for Pensions Freedoms, Picture credit should read: PA Photo/thinkstockphotos. WARNING: This picture must only be used to accompany PA Feature FINANCE Freedom Day.

In just days from now, we will see one of the biggest shake-ups to pensions in a generation.

April 6 marks ‘pension freedom day’ - when around half a million people will be handed a range of choices over what they do with their savings.

Among the options available, people aged 55 and over can decide to cash in their pension pot all in one go or take their money out in a series of slices, a bit like using their pension as a bank account.

The changes apply to people with a defined contribution (DC) pension. When they came to retire, someone with a DC pension would traditionally have used their savings to buy a yearly income called an annuity. They will no longer be required to do this under the new rules, although they still can buy an annuity if they want to.

The advantage to having an annuity is that it offers someone a guaranteed income, usually for the rest of their life. This means that you have a safety net preventing you from outliving your savings.

But annuities have had a less than golden reputation in recent years due to plunging rates and concerns about people not shopping around to get the most suitable deal for their needs. For example, some annuities can pay better rates for people who are in ill health, such as smokers, as they are expected to have a shorter lifespan.

So, what should you watch out for as retirement freedom day approaches?

Well, there are some potential pitfalls you may need to sidestep - particularly annoying texts promising a “free pension review”, or unwanted cold calls.

Concerns have been raised about fraudsters targeting people looking to take up of the pension freedoms, so tread carefully. The Pensions Regulator has warned that scams will try to flatter, tempt and pressure victims into transferring their pension fund into an investment with attractive and often unrealistic returns. Once the victim has signed the forms and the transfer has gone through, they are unlikely to see their money again and they could be left with a hefty tax bill.

Help is on hand though. Free, impartial guidance will be offered to people who are eligible for the new freedoms. The guidance, which is being provided by Citizens Advice and the Pensions Advisory Service, goes under the name Pension Wise.

It’s important to bear in mind that this is guidance, not advice, and some people may also want to go on to pay for independent financial advice.

Help is available, but what if you’re coming up to retirement and you’re not sure where to start?

Firstly, bear in mind that this is a marathon, not a sprint. April 6 is the start of the pension freedoms, not a deadline whereby you need to have done something. This is cash that you’ve probably spent decades building up for your retirement, so some careful thought will need to go into the decisions over what to do with it.

And the tax implications of withdrawing your cash will need careful consideration. People will be charged at their marginal rate of income tax for that year, so if you take a large chunk of your pension out, or cash it in completely, you could find yourself pushed into a higher tax bracket.

While you’re mulling over this, are there steps you can take now to start preparing?

Consumer group Which? has made a free guide, to help people secure a good deal for their savings and make the most of the sessions that they will be offered under Pension Wise.

It suggests that before your Pension Wise appointment, you should make a note of outgoings such as regular bills, payments and debts, as well as sources of money coming in such as investments, cash savings, employment and benefits.

Questions to consider asking during the appointment include: When can I access my pension savings? What choices do I have? and How can I limit the tax I pay?

The guide is available to download at www.which.co.uk/pensionwise2.