The ‘pension freedoms’ that came in on April 6th 2015 mean that if you have a pension ‘pot’ type of pension, you can take as much or as little cash out of it as you like, as long as you’re aged 55 or over. Well, that’s the theory. In practice, it’s not that straightforward and there are times when you have to take financial advice before you’re allowed to take money out. What do the rules say?
If you have a final salary pension
If you have a final salary or other salary-related pension (otherwise called a ‘defined benefit’ pension), where the amount you get is linked to your salary, you can’t take money straight out of your pension. In order to take advantage of the pension freedoms, you have to transfer your salary-related pension to a pension pot type of pension (otherwise called a ‘defined contribution’ pension).
When do you have to take financial advice?
You have to take financial advice if your final salary pension is worth more than £30,000. You have to pay for this advice and the financial adviser will have to sign a form to say that he or she has given you financial advice.
SAVVY TIP: Some pension providers recommend that you take financial advice even if your defined benefit pension is worth less than £30,000.
Why can’t I transfer my final salary pension without taking advice?
The reason you have to take financial advice is that the pension company must be able to show that you understand what you’d be giving up by transferring your final salary pension.
SAVVY TIP: In the 1980s there was a pensions mis-selling scandal where people were told to transfer their pension from good final salary pensions, with the promise of higher returns that never materialised. The pensions industry ended up paying out millions of pounds in compensation so, understandably, it wants to avoid accusations of mis-selling this time round
When is it a good idea to transfer a final salary pension?
It’s hard to generalise, except to say that in most cases it will definitely be a bad idea to transfer a final salary pension to a pension pot type of scheme, as you’ll be giving up valuable benefits. However, if, for example, you’re ill and don’t have long to live, you probably want to get as much of your pension fund as you can, rather than having a steady – but much lower – income.
If you have a defined contribution pension
If you have a defined contribution – or pension pot type of pension – the rules allow you to take as much or as little out of it as you want to. However, you cannot take money out of your pension unless you’ve taken financial advice if it’s worth more than £30,000 and if it has what are called ‘safeguarded benefits’. These benefits are typically a guaranteed annuity rate, which is generally much higher than any annuity rate you would get in the open marketplace today or a guaranteed minimum pension.
SAVVY TIP: As with transferring a final salary pension, if you’re seriously ill and don’t have long to live, you may well prefer to give up the enhanced benefits in order to get your pension now.
How much will the advice cost?
The cost of independent financial advice varies, but, according to Unbiased, which is the organisation representing independent financial advisers, it could cost around £825 for advice on transferring a £30,000 pension pot that has guaranteed benefits.
You can see more examples of the cost of financial advice on its website.
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