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BLOG: The vast majority are still puzzled by pension freedoms
When the wide ranging pension reforms were introduced in April 2015, it was claimed they would increase the choices available to those who had worked hard and saved responsibly throughout their working lives.
However, more than a year later, research by Wesleyan shows more still needs to be done to ensure freedom of a different kind – freedom from confusion.
The reforms mean over 55s may be able to take any amount from their personal, stakeholder and some workplace pensions – all of it in one go, if they wish – without the need to buy an annuity or move their pension fund into income drawdown. If they choose to take the whole or part of their pension savings as a lump sum up to 25% of the sum paid will be tax free. The remaining lump sum will be subject to income tax at their highest marginal rate.
These changes do mean more flexibility – and more responsibility. But the choice to dip into pension savings early isn’t an easy one, as people don’t necessarily understand what they can and can’t do.
A recent Wesleyan survey found 77% of savers do not understand the pension reforms. One in eight mistakenly believe they mean you can withdraw their full pension fund tax free. In reality they pay at least the same rate of tax as they would on their existing income on a minimum of 75% of their pension pot.
Just under a third also mistakenly believe it is necessary to retire before it is possible to begin taking a pension, when in fact you can withdraw your pension as a lump sum after 55, whether you have retired or not.
Even more worryingly, the research revealed those nearing retirement were among the most confused, with 68% of over 55s not understanding the changes.
But it’s not just pension freedoms that are causing confusion – many are bewildered by retirement planning as a whole. The same survey found that 63% of people don’t understand the key features of a pension.
The reforms do have the potential to change the lives of retirees for the better, and there are ways to cut through the confusion. A meeting with a qualified financial adviser will help ensure you make a decision based on your own personal circumstances and have the resources in place to fund your lifestyle throughout your retirement years.
Michael Copeland is area manager for Wesleyan
