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Pension Freedom but proceed with caution

Almost every weekend the financial pages of the weekend newspapers carry a story about Pension Freedom. The message seems to be that once the changes come in next April, subject to approval, everyone will be able to access their pension pot to spend how they please.

They say that there will be no place for annuities in the future. I strongly disagree with this.

Firstly, the new rules will not be available to employees who are in their company Final Salary Scheme.

For those who have the option, they will need to consider how they are going to survive financially in retirement if they take their pension pot and blow it.

A lot of the clients that I see who are approaching retirement want to be able to secure a guaranteed pension in their retirement and the best way to do this is using an annuity.

Sure, there are people with large pension funds and it may suit them to use part of the fund for an annuity and then access the remainder to use as they please.

People need to remember that the pension pot will not be tax free. You can currently take 25% as tax free cash and this will continue. But the remaining 75% will be taxed at your marginal rate, meaning you could pay tax up to 40% on a large pot.

So what does this mean?

Let’s look at a pension fund of £100,000, as an example. The first £25,000 will be tax free, leaving you with £75,000 that will be classed as income.

Assuming your only other income is a state pension of say, £5,500 p.a., after you had paid tax, the £75,000 would reduce to £53,357. You would not be able to invest this and get an income that would match an annuity.

So the choice may be there in the future, but think carefully and take advice before running off with the cash.

For sound financial advice, turn to Poole Townsend. Call Derek on: (01229) 811811 to make an appointment to talk through your options.

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