Financial planner Kevin Garfagnini’s tips on how to maximise your pension
I’m already in drawdown, what do the changes mean for me?
If you’re already in drawdown, from 27 March the maximum yearly income you can receive potentially increased from 120 per cent of Government Actuary’s Department equivalent annuity (known as GAD) to 150 per cent. However, you probably won’t benefit immediately as the change only takes effect from the date of your next anniversary review. For example, if your anniversary date is 1 March, 2014, you won’t be able to change to the new limit until 1 March, 2015. It will also depend on whether your drawdown provider has the systems in place to facilitate the change.
I’m retiring soon and am considering drawdown. What do I need to know?
For anyone going into drawdown for the first time, the calculation of their maximum drawdown income will be based on 150 per cent of GAD immediately. The government has announced that it plans to scrap this limit altogether from 6 April, 2015.
So, I can take my whole pension fund from next April?
Yes. While it might be tempting to take the whole of your pension fund as a lump sum, there are, however, tax implications. While the first 25 per cent of the lump sum is tax free, the remaining 75 per cent will be added to your existing income and taxed at your marginal rate of income tax. This could have the effect of pushing you into a higher rate band, meaning you pay more tax than you expected.
Retirement still seems a long way off. How do the changes affect me?
The new pension rules will provide you with greater freedom and choice but also with new responsibilities. While the biggest single reason for not contributing to a pension (ie: that your pension pot is locked away) has been removed, the temptation will be to dip into it too deeply, too soon – just because you can. Keep in mind that the fundamental principles of planning for life after work remain the same: Get saving; consider your income needs; think about your investment risk, and don’t forget about tax.
• Kevin Garfagnini is director at Mazars Financial Planning