You might have heard or read that there a changes afoot to the minimum pension age but, unsure of how it affects you, you put it to the back of your mind. Pensions are indeed as exciting as a cardboard licking competition and once you have completed one they can easily be thrown to the back of the cupboard awaiting the wonderful retirement date where we hope we can afford our Swedish standard services for American prices.
Financial documents like these can sit in the boot of the car like your sports bag from the Saturday match, with each day ensuring the opening of the boot is less appetising. The following Saturday morning is not a great choice. It may be time to air them.
Last week we had pensions awareness day, and whilst it doesn’t quite roll off the tongue like a trip to the Bahamas, it will have heightened attention to issues you need to consider within your pension.
Some other really useful thoughts for you:
Not all pension schemes have death benefits that are favourable. You may have contributed for many years and built up a sizeable fund, but some older schemes have a death benefit where all your family receive is a return of premiums – nothing more, and losing all growth in between.
I’ve often seen these inside schemes with other guarantees you may not want to lose like a guaranteed annuity rate. A guaranteed annuity rate is a benefit set in stone inside your pension scheme at the outset and most often worth protecting, but you cannot blindly look at that guarantee and ignore some of the downsides. For example, there may be restrictions on when you take the benefit, ie, on that date, and not before, or after.
You may not wish to take an annuity but instead move your cash into a drawdown arena for its flexibility and options and therefore give up your guarantee. It is better to find out all of this now rather than later. Quite often, guaranteed annuity schemes do not allow you to vary the benefits on death. So the guaranteed annuity might be for you only, ceasing on death, whereas most would like their scheme to continue to be paid to their spouse or family.
I’ll not stick on this point too long given its excitement, but another potential issue by sticking to this sports bag deep in your wardrobe is the choice of funds. They can often be very limited. I’ve previously described the difference of a £100,000 fund over 20 years describing the best and worst fund. Over just those 20 years the performance difference was over £900,000.
Whilst we cannot dictate which are the very best funds in advance, the characteristics and structure of the best and worst funds are obvious.
A pension is free money. If you put your money in a building society today its c1.8% return and it will struggle to beat inflation. However, an investment into a pension attracts an immediate uplift of 25% straight from the tax man – a nice feeling in itself. If you are a higher rate taxpayer, its 66% growth and even more if you are a top rate tax payer.
The impact of changes to minimum pension age
In 2028, the minimum age for access to your pension will rise to 57 from 55. If you have a scheme which is protected by an ‘unqualified right’ you can claim after age 55. You can also transfer into one of these schemes now.
The ‘unqualified right I’m referring to has to be in place in the scheme from February 11, 2021, and you have until April 2023 to join it.
Before transferring, think if you really need those two years and what you may be giving up, i.e., access to the best funds, Inheritance Tax planning options, and the aforementioned guarantees. In any event, find out if your current scheme offers that protected right before considering anything.
And finally, be sure to tidy your affairs so your family know where they are. Some organisations offer a discount on their fees when you put your funds into one holding, and similarly by grouping family holdings, further discounts can apply.
Hopefully that made cardboard more interesting, but if you have a financial query please call 01872 222422 or email [email protected] or visit us on wwfp.net.
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About the Author / Peter McGahan
Peter McGahan is Chief Executive Officer of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
