From a taxation point of view this means that the income tax bill is effectively spread over the remainder of the individual’s life however there is very little scope to make changes if the individual’s circumstances change.
The major advantage of a scheme pension is for those who have savings in excess of the Lifetime Allowance (LTA). Under this option rather than the fund value it is the level of income that is tested against the LTA. The income is determined on an individual basis by the scheme actuary who is at liberty to include indexation and capital/income protection options which can reduce the level of initial income and effectively “soak up” some of the excess savings. In all other aspects it is similar to an annuity.
Summary
There is no doubt that Freedom and Choice has made pensions seem more attractive to the average saver, however it does mean that there will be some difficult and crucial decisions to make at retirement. Tax is only one of the factors that must be taken into consideration and every individual will have different needs and priorities. Financial advisers are ideally placed to help people assess their needs and provide a recommended course of action.
Fiona Tait is Business Development Manager at Royal London
More information regarding the changes to pension legislation can be found on Royal London’s website: www.royallondon.com
