Video transcript

Flexible access to pensions from age 55

00:09 - Russ Mould
Hello I'm Russ Mould AJ Bell's Investment Director and I'm here with our Head of Platform Marketing Mike Morrison to discuss the new Pensions freedom‘s you will be able to enjoy from the 6th of April 2015.

00:18 - Now in this 3rd section we are going to look at the way you can take benefits from your Self Invested Personal Pension or SIPP under these new Pensions freedoms.

00:26 - Now, Mike can you explain the different ways in which savers can access their pensions under the new rules.

00:32 - Mike Morrison
Well Russ, pension schemes are a fund of money we know that and generally there's a percentage you can take as a tax free lump sum, normally that’s 25% of the fund as a tax free lump sum and the rest needs to be taken as some form of income.

00:44 - Now with the new rules you will either be able to take your whole fund in one go, so that would mean that 25% of that is tax free and the rest would be taxed at whatever your margined level of tax would be. You could take a regular income, you could buy an annuity, or you could take regular chunks of money.

01:00 - Perhaps you've got other types of assets, other income that you could dove tail together with your pension sums perhaps to give you a tax efficient income.
There is all sorts of mix and match approaches and really it's down to taking some form of view on what you need going forwards and some of the tax efficiency of how you take that money.

01:18 - Russ Mould
So there are 3 or 4 different options there without wishing to confuse people, how does that compare with the rules as they stand now as I'm sure a lot of people are actually quite familiar with those.

01:28 - Mike Morrison
Well I think there's a bit of a red herring in here, in that this was introduced by the Chancellor as no one needs to buy an annuity.

01:33 - You've not had to buy an annuity for a number of years but where this has really taken the public’s attention is this idea of having absolute freedom over being able to take the whole fund in one go, smaller lump sums or still take a regular income, but this time you've got the choice. You've got the choice to tailor your pension fund profile in a way that suits your income and capital of requirements.

01:55 - Russ Mould
So we will look at, and we will come on to annuities later by the way, so if we look at the three sort of new options as it were of one big lump sum, small lumps or regular income.

02:04 - I mean what are the pros and cons of each one for individuals again depending on their personal circumstances.

02:09 - Mike Morrison
The pros and cons of taking all your cash free cash at once is: do you need it?
What are you going to do with it? There's no point in...

02:15 - Russ Mould
Sticking it in the bank and earning nothing on it and paying tax on that.

02:18 - Mike Morrison
Exactly, leave it in your pension fund if you are not going to do anything with it.
It grows in a tax advantaged environment and you can use it tax efficiently perhaps on death.

02:18 - So that’s one side of it. Do you need a regular income? If you do, how much do you need? How long has that income got to last for? Perhaps you need to program out whether you need regular income.

02:35 - Russ Mould
Work out your household bills, what your monthly expenditure is.

02:37 - Mike Morrison
Exactly, work out roughly what you can afford, what’s the level of income you can't live below for instance and really try to get yourself I think a roadmap almost of how you would like to see your resources spent in an efficient way.

02:50 - Russ Mould
OK that makes sense. Now you mention the word tax once or twice. HMRC are obviously very involved in this process. What are the tax implications of again the different ways in which people can access their pension pots.

03:00 - Mike Morrison
By its name the tax free lump sum is tax free.
Now the rest of it, be it divided into smaller chunks or larger chunks, will form part of your income for tax purposes. So again, perhaps if you’re a basic rate taxpayer adding too much income might take you into a higher rate taxpayer.

03:18 - Russ Mould
So maybe you need to smart and think about where your tax bands fall and how much you tax and how you time your income.

03:22 - Mike Morrison
Exactly, it’s about trying to understand the hierarchy of pensions and your other income.
It would be very unfortunate if you just took a little bit too much income and that took you into the higher rate tax threshold.

03:31- Russ Mould
And then you got clobbered

03:35 - Mike Morrison
Exactly, so a little bit of planning and you could perhaps tax efficiently take out income in the right years at the right time, minimise your tax.
If necessary spread it over three or four years and you've get a basic rate tax allowance for 3 or 4 years. Each year you've got your tax allowances. Use those tax allowances properly, that’s what they are there for.

03:50 - Russ Mould
Ok now you mentioned the allowances there, are there any other allowances that people need to be aware of, or any other important numbers when it comes to how much money people can put in and indeed how much they can withdraw.

04:00 - Mike Morrison
Right I think again is you pension your retirement or are you going to continue carrying on paying money into your pension. Normally you can pay up to £40,000 per year into your pension and get full tax relief on that.
Now, if you start taking income under the new rules you invoke, excuse the jargon for a minute, what’s termed the money purchase annual allowance.

04:19 - Russ Mould
The MPAA.

04:22 - Mike Morrison
The MPAA.

04:23 - Russ Mould
So if you hear that one that's what it means.

04:24 - Mike Morrison
Your £40,000 annual allowance drops to £10,000, so your still can pay in £10,000 contribution but it’s much lower. So perhaps if you still want to maximise pension contributions there are other ways of doing it and perhaps you need to look more carefully before you start.

04:36 - Russ Mould
So that’s if you draw the income but if you just draw the tax free lump sum you still get to put in the £40,000 is that correct?

04:41 - Mike Morrison
If it’s just the lump sum, as soon as you draw £1 of income that’s when you invoke those limits. 

04:46 - Russ Mould
Just to be clear on that that’s fine, so thank you for that Mike.

04:49 - Now we appreciate that this is all quite technical and can be a lot to take in.
You can therefore find more information on our website, the address of which is shown here.
You can also use the Government’s service Pension Wise. You can ask them for a face to face meeting, help over the phone or log onto the website and again the address of which is clearly displayed right here. So thank you very much for your time watching this video and please look out for the others dotted around our website on the new Pension freedom.