Saturday, 28 March 2015

New Flexible Pensions

Just over a year ago, the Chancellor announced some far-reaching changes to pensions. The new rules  give us all far greater flexibility over what we can do with our pension pot. The changes are coming into force in just over a weeks time - 6 April 2015.

There will be many thousands of people approaching retirement and wondering what to do about their pension. The government have now got the Pensionwise site up and running and this will be the first point of reference for many. In addition to the info on their website, it will be possible to get telephone guidance via the Pensions Advisory Service or arrange an appointment with a pensions adviser at a local Citizens Advice office.

Under the old regime, most people would exchange their pension pot for an annuity. It was relatively simple, you give up your pot of accumulated pension for a guaranteed income for the rest of your life. The main decision would be whether to accept the offer from your existing pension provider - usually one of the large insurers - or whether to shop around for a better deal.

Basically, the new rules mean anyone aged 55 yrs and above with a personal or stakeholder pension as well as those with a SIPP will have much more flexibility on how they would like to take money from their pension. The first 25% of any sum withdrawn remains tax free (as before) - sums above this will be taxed at marginal rates, for most this will be 20% but for those who have a modest income, they may be able to withdraw sums up to their personal allowance of £10,800 tax free.

Those with larger pension pots need to be aware that all sums taken out above the tax-free 25% is regarded as taxable income for the tax year in which it is taken so will be added to other taxable income. Large withdrawals in any one tax year may therefore become liable to tax at the higher rate of 40%.

Whilst the new flexible access to pensions is generally thought to be positive, I suspect it may cause as many problems as it tries to solve and may be a big headache and possibly result in extra expense for the many thousands of pensioners wondering what to do.

Regular Income

Of course, most people who have spent years building up their pension, will wish to use the pot for its original purpose - to provide a steady regular income. Before the changes announced last year, most would purchase an annuity and be guaranteed an income for life. However, whilst this is still an option - particularly those in poor health for example - most will be looking at ways to take some form of drawdown income from their existing pension pot.

Having consolidating my hotchpot of various smaller pension pots into one SIPP some years back, it was not too difficult to move this into income drawdown in 2012 when the time had arrived for me to take a regular income from my pension. The individual shares in my portfolio were sold and reinvested in a few more income investment trusts - this reduced the volatility of the shares and also provided a more diversified portfolio.

The whole operation is now very low maintenance and I can leave well alone and harvest the income as it rolls in.


As with many aspects of investing, it will always pay to keep an eye on costs - I do not follow the non-diy sector but I am fairly sure some of the larger insurers - Prudential, Aviva etc. will now be offering more flexible ways for existing pension customers to access their pot, so it will be worthwhile to check out this option and be fully aware of what the costs would be.

For those who feel the fees and charges are too much and who wish to operate drawdown income at minimal cost on a diy basis, it may be worth exploring a transfer to a low cost SIPP provider. (I may cover this in another article at a later date). Many of these providers - AJ Bell, Hargreaves Lansdown, Best Invest, Charles Stanley Direct for example - will have sections of their website dedicated to explaining the changes.

Of course, there is always the option to take advice from a suitably qualified adviser. The costs of advice can be relatively expensive, especially for more modest pension pots - maybe around £1,000 to £2,000 would be a ballpark figure. This may be appropriate in some situations however, I am sure many more will be able to spend a little time on research and come up with a decent diy plan.

Run Out of Money

We are all living longer - so goes the mantra - but we don’t know how long we will live - some will live to 100, some will die in their 60s or 70s. The big danger for many people will be running down their pension pot too quickly, especially if they have been dipping into capital for unplanned expenditure.

It will therefore be important to have some sort of plan or strategy to take advantage of the new pension freedoms. The key question will be - what is the safe and sustainable rate of withdrawal? For many years various academic studies pointed to a rate of 4% but more recently other studies suggest a reduced figure may be required to take account of lower returns and longer life expectancy.

For me, the answer would have to be - withdraw the natural income generated within the investments, without touching the capital sum. This is what I do with my own drawdown SIPP. Of course, you would probably want to hold those investments which generated the higher returns - so equities would be in the mix as they provide higher returns than bonds or cash deposits (over the long term). In addition, equities will provide a rising dividend income which will rise each year and keep ahead of inflation.

Fixed interest securities, as the name suggests, will not do this (but they may give some modest capital appreciation). However some bonds and fixed interest securities such as corporate bonds and gilts are less volatile and will provide a ‘smoother’ ride.

What Level of Income to Expect

Depending on the asset allocation for income between equities and bonds, we might therefore settle on a figure of 3.5% for a sustainable rate of return. Lets see what sort of lump sum pension pot would be needed to provide what level of income.

Starting with a modest pension pot of £20,000 - this would generate an annual income of £700 or £58 per month.

£50,000 would generate £1,750 or £146 pm

£100,000 will generate £3,500 or £292 pm, and

£250,000 will generate £8,750 or £729 per month

I imagine some people will be surprised to see how much is needed to generate quite modest amounts.

I have come across individuals who are a bit dismissive or sniffy about the state pension however, its worth pointing out that the new flat rate pensions which come in next year will start at around £155 per week which is just over £8,000 per annum. Therefore an individual would need a £230,000 pension pot to generate the equivalent amount!

So, to coin a phrase from Retirement Investing Today, young people will need to save hard and invest wisely if they want to retire early on a decent income.

As ever, slow & steady steps…..

Finally, just a word of caution to all - there will be a multitude of scammers and criminal fraudsters out there preying on the vulnerable, naïve and trusting individual pensioners. They will use many clever ways to part people from their pension pots. The industry forecasts indicate there will inevitably be many, many people losing huge amounts of money so please make sure you and/or your relatives are not one of them.


  1. Hi John

    Great awareness post and thanks for the hat tip.

    "Basically, the new rules mean anyone aged 55 yrs and above with a personal or stakeholder pension as well as those with a SIPP will have much more flexibility on how they would like to take money from their pension." Only for the older amongst us. The younger get a personal pension access age slap in the face with the changes. It will be age 57 from 2028 and then increase in line with the State Pension age by remaining 10 years below State Retirement age.

    Regarding your word of caution. I agree 100% with you. 'Scamming' those that have saved into pensions is going to become a massive 'industry' in this great country. I'm already seeing advertisements for people willing to 'help' with that help looking like a method to help them line their own pockets rather than that of the mark.


    1. Good point RIT.

      I recall it was not too long ago that pensions could be taken at age 50 yrs. There has been too much 'tinkering' by politicians in recent years imho - time to call a halt and let people get on with making their long-term plans.

  2. I agree with RIT - a really clear and comprehensive summary of the changes.

    In my own case the new rules enable me to save into a SIPP whilst still working (on top of my DB pension) and use it, along with an old FSAVC to fund the years between when I retire (hopefully at 58) and being able to access my Local Government pension virtually unreduced (at 65). This wouldn't have been possible (or it would have been much less attractive) under the current capped drawdown/annuity rules.

    It will be interesting to see how it all pans out though and how the providers adapt to deal with it. I'm quite glad I have a couple of years to go as I think it might all be a little "messy" until things settle down.

    1. Maybe I should have made clear in my post that the pension freedoms do not apply to final salary/ occupational schemes.

      Good to hear the new provisions will give you more options Cerridwen. I agree, there will be a lot of confusion in the first year or so whist everyone gets used to the changes and their full extent is clearer. As you have your SIPP, it should not be difficult to convert to take benefits when required.

      Thanks for stopping by and good luck with your plans.