The changes to pension rules announced in the Budget surprised just about everybody. They mean that those with personal pensions or other defined contribution schemes will have far more choice about how they take their benefits.
While buying an annuity has been the default option for most people, many have begrudged locking in to the low income rates we’ve seen since 2008. This lack of perceived value has stopped many people investing into pensions.
Will the new rules work?
It is difficult to argue against new rules which will provide more flexibility and greater choice for people. However, with more freedom comes more opportunity to make the wrong choices.
Many will be sorely tempted to take the money out of their pensions when faced with what they might see as a choice between a significant lump sum or an unattractive level of income through an annuity.
There is little doubt that some will treat this ‘windfall’ recklessly, perhaps on a blow out round-the-world cruise or something equally as extravagant. Others will simply make the wrong choices.
What should you be considering when thinking about cashing in some, or part of your pension?
In the current low interest rate environment it is difficult to generate a decent level of income without taking risk. This could mean that capital is eroded, perhaps quickly. A common problem people make is under-estimating their own longevity. At age 65 most people are not at ‘death’s door’ and many will have 30 or more years left to live. This means 30 or more year’s income will be required.
In his Budget speech George Osborne said that those taking pension benefits would get face-to-face guidance. It is useful to give people a helping hand when they are making what are likely to be crucial financial planning decisions which could affect their future standard of living.
However, those providing the guidance may be unlikely to risk any future comeback by recommending anything other than the safest possible option – yes, buying an annuity.
What choices will I have?
For all of the freedom that the new pension rules will bring, individuals will essentially have three choices:-
What's the downside of the new rules?
This final scenario could mean people taking risks with their standard of living in retirement and with nobody else to blame if it all goes wrong.
What should you do to prevent this happening to you?
The proposed pension changes should be welcomed and many people will benefit from them, particularly those who get the right independent financial advice. However there will undoubtedly be tales of woe from those who make their own decisions, get it wrong and lose out as a result.
To make sure you aren't one of those people and especially if you own more than one property, it would be prudent to take independent, expert financial advice from a regulated financial advisor who can make recommendations or review your thoughts and ideas of how you intend to fund your retirement.
Thinking or already investing in property for your retirement? Then take a look at Chase de Vere's:-
Guest article from Patrick Connolly
Head of Communications
Chase de Vere