Leading pensions advice across Edinburgh, Glasgow and Central Scotland

Retirement can often seem a distant prospect, but it’s never too early to begin preparing for it. While employees can typically retire any time after their 55th birthday, the state pension doesn’t kick in for at least a decade. That means personal or employer-managed pensions play a crucial role in terms of providing financial security.

To help people prepare for a comfortable retirement, the Government recently relaxed the rules on pension access. Instead of being forced to buy an annuity, people now have far more choice about their pensions. That includes being able to access some or all of a pension pot prior to retirement, even while the policy holder continues to work. A quarter of the total fund can be withdrawn tax-free as a one off lump sum or 25% of smaller amounts, with few restrictions on its use.

However, that tax-efficient pension fund will have been carefully amassed over decades, so managing it efficiently is vitally important. For example, a lump sum withdrawal could be used as a deposit for a buy-to-let property, to clear an existing mortgage or to invest in a new business. The most important thing is to ensure that any raid on the pension pot is contributing to a secure future. Although the lump sum could be lavished on a round-the-world cruise or a sports car, this would hardly be an efficient investment – unless the sports car in question is an appreciating classic, or the cruise will form the basis for a travel book…

The team at Select Investment Managers have considerable experience in advising people about reinvesting their tax-free Pension Commencement Lump Sums. Our trained financial advisers can provide expert guidance about the practicalities and implications of withdrawing pension funds, such as the reduced returns that can be expected from the remaining assets. We are happy to sit down with clients in our Edinburgh, Livingston and Falkirk offices, discuss the best way to access and exploit a pension fund in a tax efficient way while maintaining an appropriate level of income throughout retirement. We can also advise on minimising tax liabilities with your retirement planning and setting up annuities, or establishing other investment vehicles.

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Unlocking the capital in a pension fund

The traditional method of accessing pension funds involves an annuity. However, with a pension freedoms Government initiative and with annuity rates at all-time lows and most products lacking flexibility, these are less popular than they used to be. Nonetheless, policy holders can typically choose from one of three annuity types:

  • (a) A lifetime annuity, where payments are made for the rest of your life.
  • (b) An impaired annuity, this is the same as a lifetime annuity but you may get a higher payment due to your health.
  • (c) A Fixed term annuity, this is where payments are made for an agreed period of time e.g. five years.

Although having the ability to withdraw money from a pension fund provides greater choice than an annuity, removing the entire pot will eliminate any regular income that might otherwise have been delivered. As life expectancy continues to rise, there could be many years where the financial security of a monthly pension payment is essential. Pensions typically generate better rates of return than personal savings accounts, and new retirees often choose to leave their accumulated funds in low-risk pension vehicles.

It’s worth noting that many companies offer ‘pension liberation’ schemes that allow those aged under 55 to access their pension pots. There are very few circumstances where an individual aged under 55 can access their pension pot, such as severe or terminal ill health. These schemes are normally unregulated, levy very high fees, can result in huge tax bills and even the loss of your entire pension fund.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount you invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
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