Pensions freedom will be a free-for-all

Pensions freedom will be a free-for-all

From 6 April, pension savers will be set free. On that momentous day, the over-55s will finally be unchained from the obligation to buy an annuity at retirement, and liberated to spend their pension pot on whatever they want.

The great liberator, Chancellor George Osborne, hopes they will shower him with gratitude at the polls in May.

But for many, any initial gratitude will soon turn sour.

Taxation Freedom

Hundreds of thousands are expected to use their new-found freedoms to extract cash from their pensions, but they will quickly discover that freedom comes at a price.

You won't be surprised to discover that the taxman will be first to name his.

HM Revenue & Customs will expect a share of any cash withdrawal, in the form of income tax.

Although you can take the first 25% of any withdrawal free of tax, the remainder will be taxed at your personal rate.

This means up to 20%, 40% or 45% of the cash you take may be gone in a thrice.

Double Tax Trouble

Unsuspecting people who take out a large lump sum in any given tax year could find it pushes them into a higher tax bracket.

This means they will pay more income tax than if they had withdrawn the money as income, year after year, through an annuity.

Up to twice as much tax, if it pushes them from basic rate to higher rate tax.

Fraud Free-For-All

The taxman won't be the only one making free with your money.

Crooks and conmen see pension freedom as a once-in-a-lifetime opportunity to relieve unsuspecting pensioners of their lifetime savings.

The fraudsters are already swarming, bombarding people with unwanted texts, emails and cold calls.

It won't be long before the newspapers fill up with hard luck stories of people who lost their lifetime savings to dodgy scams dressed up as great investment opportunities.

They won't be expressing their gratitude to George Osborne, either.

Freedom At A Price

Nor will pensioners who find their cash runs out halfway through retirement, either because they blew it too quickly, or lived longer than they expected.

People moan about annuities but at least the income is guaranteed to last for as long as you live, however long you live.

The Department for Work & Pensions has just made it clear that any money you take will affect your entitlement to future means-tested benefits. Thousands could end their days in poverty as a result.

First-time buyers will also lament pension freedoms when a wall of liberated cash hits the property market, as the over-55s pour into buy-to-let to fund their retirement.

Cry Freedom

There's a reason why politicians stepped back from granting pensions freedom in the past. Soon we will have a practical illustration of why they were right to be so cautious.

A good way to make sure your money keeps growing in retirement is to invest in the shares of dividend yielding FTSE 100 companies.

The FTSE 100 is packed with top stocks paying as much as 5% or 6% a year, with any capital growth on top.

To find out how dividend-paying stocks can fuel your retirement, download the Motley Fool's latest FREE wealth report How To Create Dividends For Life.

This explains how reinvesting dividends for growth will generate almost half your total returns from investing in stocks and shares.

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The world's most successful investors
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Pensions freedom will be a free-for-all

Soros is one of the world’s most famous speculators - who sees the market as something to place highly leveraged bets on rather than invest in.

He cemented his reputation by shorting the pound on Black Wednesday in 1992, and making $1 billion from the collapse of the British currency and the near-collapse of the Bank of England.

He is another noted philanthropist, giving primarily to human rights, public health and education charities.

Slater was another highly controversial investor, known for corporate raids on public companies, and subsequent asset stripping to realise quick value for shareholders.

He also invented the phrase ‘The Zulu Principle’ to describe the importance of being a specialist when you are investing, so you can concentrate your research efforts and know more than the rest of the market about something specific.

Woodford (CBE) gained his reputation at the helm of the Invesco Perpetual Income and High Income funds, by offering relative stability and reliability in even the toughest markets.

His trademark was to make bold decisions about the companies he wanted to be invested in, and then stick with them - no matter how unfashionable his decisions were.

It led him to buy tobacco stocks in the 1990s (because he felt that concerns about the legal threats to the firms were overplayed) and avoid technology in the dotcom bubble.

Woodford currently runs Woodford Investment Management.


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Pensions freedom will be a free-for-all

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.


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