Tuesday, 26 May 2015

What do pension reforms mean for you?



With the election of a new government in May, we have seen a lot of policy changes being put forward. One new piece of legislation that came into force in April gave pensioners and people at the retirement age of 55 greater access to their pension funds. The most significant part of the Chancellor's pension reform is the ability to now access 25 per cent of your pension pot as a tax-free sum, with the remainder being taxed at a lower, personal rate.

Previous regulations - especially for defined contribution schemes - typically resulted in pensions being locked into annuity. As the majority of pensions did not qualify for drawdown policies - due to a multitude of restrictions and regulations - pension pots were primarily invested into these secure, but wholly unprofitable annuities that could see a lifetime payout of an average of a 5 per cent yearly return.

A pension fund of £100,000 with a 5 per cent annuity rate would give a £5,000 yearly income. It is now predicted, however, in light of these pension reforms, that those now reaching pension age will opt out of unprofitable annuity. Instead, they might look to invest their money in drawdown policies. The most savvy of investors, however, will look to the financial sector or the even more lucrative property sector for the greatest financial returns. The property market, despite the rapid downturn of the financial climate over the last decade, has remained buoyant, and is now set to return to former strengths following the recent election outcome.


Halifax house price data shows £100,000 invested in property brought in a 132 per cent return, whereas the same sum put into UK equities, even with dividends reinvested, made 83 per cent.

Opting to invest your money in the property market looks significantly more attractive when we take into consideration that between 2000 and 2014, Halifax house price data shows £100,000 invested in property brought in a 132 per cent return, whereas the same sum put into UK equities, even with dividends reinvested, made 83 per cent.

The 2015 Budget also suggests that as of April 2016, pension funds will no longer be locked into previously purchased annuity; this legislative change would see the annuitant having the option of 'cashing in' without facing the current tax penalty of somewhere between 55 and 70 per cent that is currently in place - a hugely welcomed policy for anyone looking now to invest their money in more financially rewarding ways.

People now reaching pension age have lost the benefits of the Final Salary Scheme; however, the lifting of pension restrictions coupled and being able to withdraw a 25 per cent tax-free sum goes some way to alleviating the financial loss. The scrapping of the 6 month time limit on how the rest of your fund is invested (be it annuity, a drawdown pension or removing it all as a cash payment) further relaxes the myriad of tight restrictions on your money.