With just a week to go until the new pension freedom reforms come into effect, it is estimated that around 400,000 savers will take advantage of the changes.
From April 6th, a saver can access their pension pot and use it like a bank account – taking as much or as little from it as they choose, whereas previously they would have had to buy an annuity.
Data from the Office for National Statistics shows the average defined contribution pot is worth £25,000 and many are likely to use this amount to fund major financial commitments such as home improvements, new cars or luxury holidays. Many savers have said they will use some of their pension cash to help out family members with house deposits or university fees.
Around 540,000 people will be able to access their pension pots for the first time next week, and financial experts predict that a large proportion of these will do so.
From next week pension savers will be able to completely clear out their pension pots if they choose, take part of the pot to reinvest and leave the rest put, or buy an annuity which will offer them a guaranteed income for life.
There is much talk in the press about the tax implications of withdrawing large amounts of money from a pension fund. Whilst the first 25% of any withdrawal is tax-free the rest will be taxed at a person’s personal allowance. However, many may not realise that the withdrawal will take them into a higher tax bracket, and they may find they have to pay 40% tax rather than their usual 20%.
In a bid to make annuities fairer and better value, the Financial Conduct Authority has brought in new measures where annuity providers have to rank their annuities against rival companies.
This way savers will be better informed and will know where they can get the best annuity and therefore the best retirement income for their money.