The New Pension Rules
23 March 2015 |Advice & Guidance
What They Mean For You
As of April 6th 2015, the requirement to buy an annuity with your pension will be abolished. An annuity is an annual retirement income that is paid to an individual for the rest of their life.
The change means that savers will have access to their pension pots after the age of 55 – with a lump sum to do as they please with.
Whether you’re approaching your retirement or have a few years to go, it’s important to assess what these changes mean to you and if you could use this law change to your advantage.
This will effectively allow you to use your pension money as a bank account if you so wish, allowing you to draw out the money as and when you want to on an ad hoc basis. Your options for making the most of this law change depends how much you have managed to save and how much you expect to live on for the remainder of your life – budgeting is crucial.
At age 55 or over, you can release up to 25% of your total pension as a tax free lump sum – after April – you can access the remainder at tax rate – this could be kept in your pension and dipped into as and when, moved into a different investment scheme or spent and budgeted as you wish.
If you do find yourself with a lump sum or spare cash you’d like to invest and spend rather than save – there are some options:
Property is a popular option of investment for those finding themselves in money. You could invest in a buy to let, pay off a house deposit for a child or grandchild which they pay back in instalments to you or invest in a holiday property you rent out when you’re not using it. According to a poll by Channel 4 dispatches, 16% of retirees planning to cash in their money are planning on investing in buy to let -a good way to invest your money and have a continual cash flow coming in.
1.4m people in the UK own property which they let for income and 14% of mortgages are buy to let. But do your research, if you haven’t invested in buy to let before. How much will you have to put into a deposit and how much is the mortgage? What is the market like and how much will you make after costs?
Get to know your potential customer and area when you buy your properties. What size and type of person are you aiming at? A house for a family, a small house for a couple or new family or a flat for a couple or a young professional? New builds as well as two bedroom houses and flats are recommended by successful by to letters – thanks to lower maintenance costs and hitting the ideal profile of the young professional and those renting while they save to buy. Commuter belts, business hubs and good transport links are all desirable factors.
Using a letting agent cuts out the work of finding and screening potential tenants, vetting is essential, but they do charge around 10%. If you decide to do the work yourself, be through and don’t skimp on a good inventory and landlord insurance.
Remaining on the property front, invest in your existing home rather than a new one – meaning less of a huge financial blowout and the benefit of increasing the value of your home. Think about changes your home could benefit from. A new kitchen is always desirable for a buyer and if you’re a keen cook – improves the enjoyment of your home with your newly acquired free time.
Alternatively, treat yourself to a conservatory – an excellent home value increaser and a brilliant place to spend spare time year round as well as increasing the size of your home and creating a transition between home and garden.
Or what about your windows and doors? Have there been jobs you haven’t got around to or ways you could make the home more energy efficient? With more time at home you’ll be thankful of a warmer environment and cheaper energy bills – so now could be the time to look into double glazing or comfort glass and better insulation – increasing both your comfort and the value of your home.
Now could also be the optimum time to embark on some DIY and transform your home, whether that means redecorating your entire home, making small but impactful changes, ticking off odd jobs you’ve been meaning to get around to or even trying your hand at some crafting – your retirement and pension pot could be just the thing to push you into gear. These projects will help keep you busy as well as increasing the value of your home and creating a great living space you previously only looked at in home magazines.
Book a Holiday
A survey by Saga has revealed that 8% of people approaching retirement said they would use some of their pension money for holidays. In Australia, where people can already cash pensions, 14% use some of their pension money for holidays. The desire for a holiday is understandable after a lifetime of work; it could finally be time for that holiday of a lifetime. While you won’t see a return on your money, you will get to invest in memories and experience.
Whether you want to embark on a gap year, a luxurious holiday or a cruise now could be the perfect opportunity to finally do it.
Pay off Debt
If you have any outstanding debt or perhaps have a child or grandchild in debt – now could be the time to clear it off and avoid any more tax or charges. You’ll be thankful of it along the line and it will take a huge burden from your shoulders. If you’re helping out a family member, you could perhaps organise a payback scheme that works for you both.
If you’re still unsure about what the pension freedom reforms mean to you, the government is offering free money guidance. Citizen’s advice will be offering face to face sessions and the Pensions Advisory Service will be offering help over the phone. There will also be online advice and guidance. To qualify for free help and advice – you need to be approaching the age of 55 or older and in a ‘defined contribution’ or money purchase work pensions. For more detailed advice and individual guidance about spending, saving or investing – it might be worth paying a financial advisor.