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Pension Changes

Pensions

Gareth Trainor

2nd April 2015 at 3:32pm

From 6 April, new rules will give you more flexibility and control over how you take your money out of your pension. These apply to anyone with a defined contribution (sometimes called money purchase) pension – whether that’s a company pension or a personal one.

I’m in a pension. Like many people, it’s in an investment option that changes how I’m invested as I approach retirement. Options that do this for you are often called lifestyle profiles or target dated funds. They tend to start off in funds or investments that aim to grow your money as much as possible. Towards your retirement date they automatically move you into different investments that remove some of the risk.

My lifestyle profile is set up for me to buy a fixed income for life – an annuity – when I retire. That means it’ll align my money with annuity rates as I near retirement, effectively taking some of the risk out of buying an annuity.

But given the new pension freedoms, I don’t expect to buy an annuity when I retire any more. I plan to keep my money invested, giving it the chance to keep growing. And I may take some of it as flexible income, also called drawdown. So the way I’m invested right now won’t be suitable for me soon.

Luckily for me and for savers like you, pension providers are responding to the new rules. They’re looking at the options they offer to make sure there’s something to suit all of us, however we choose to use our pensions in retirement.

So this year, don’t just throw out letters about your pension or delete your email updates – it’s likely that any communications about your pension you receive in the coming months will be very important. And it’s up to each of us to know what our options are and decide what’s right for us.

What are the pension changes?

Pensions cake stand

Please be aware that your product provider may set a minimum investment level on their products for people leaving money invested.

From April, you can choose one of these options or a combination of them to suit you. But think carefully before taking out all your money at once, as it could lead to a large tax bill.

The increased choice means that it’s a good idea to think about how and when you’ll take income from your pension before you retire. But don’t panic if you don’t have the answers right now as there’s no need to rush. Here are some key points to help you make sure that what you’re invested in is right for you, when you’re ready.

What are your options?

  • If you still plan to buy an annuity, you probably want to look at options that target this. These will often invest in long-dated government bonds, which tend to move up and down in value in line with annuity rates. Since annuity rates determine what income you can buy, this means your income in retirement will have some protection from last minute changes in annuity rates
  • If you’re going to take all your money as a cash lump sum, you might want to look at options that move your money into low-risk funds as you approach retirement. This helps protect you from significant changes in stock markets just before you take your money out
  • And what if you’re going to stay invested? Given retirement can last 30 years or more, you may be happy to invest, and not want to reduce your risk too much. But if you’ll be taking an income from your investment you may want to consider moving into investments that aren’t too volatile.

Not sure what you’ll be doing – or in a company pension?

If you don’t know what you’ll be doing, it’s a good idea to look for an investment option that’ll give you flexibility later on. In a personal pension, this might mean choosing a lifestyle profile that keeps your options open.

If you’re in a company pension, your employer is likely to have a default option. In the past, these options mainly moved into investments that would be suitable if you were going to buy an annuity – as most people previously did. In future more people may choose not to buy an annuity. Many employers and pension providers are responding by developing different investment options that can give you the flexibility you need.

We’re working with employers and pension schemes who are investing large amounts of time and effort into making sure their default option is right for the majority of their employees. So if you don’t know what you’ll be doing after you retire, your employer’s default investment option is usually a good place to start.
It’s important to make sure your pension investments are suitable whenever you’re thinking about retiring. Hopefully these general points have got you thinking about the changes arriving in April.

How you invest will always depend on your own individual circumstances and preferences. If you want advice that’s suitable for you speak to an expert to get information on your own situation.