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In Budget 2014, Chancellor George Osborne promised greater pension freedom from April next year. People will be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax -free.
For some people, an annuity may still be the right option, whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown. 'We've extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum, 'Mr Osborne said.
From 6 April 2015, people will be allowed full freedom to access their pension savings at retirement. Pension Freedom Day, as it has been named, is the day that savers can access their pension savings when they want. Each time they do, 25% of what they takeout will be tax-free.
Free to choose
Mr Osborne said, 'People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan. 'From 6 April 2015, people aged 55 and over can access all or some of their pension without any of the tax restrictions that currently apply. The pension company can choose to offer this freedom to access money, but it does not have to do so.
It will be important to obtain professional advice to ensure that you access your money safely, without necessary costs and a potential tax bill.
Generally, most companies will allow you to take the full amount out in one go. You can access the first 25% of your pension fund tax-free. The remainder is added to your income for the year, to be taxed at your marginal income tax rate.
This means a non–tax payer could pay 20% or even 40% tax on some of their withdrawal, and basic rate taxpayers might easily slip into a higher rate tax band. For those earning closer to £100,000, they could lose their personal allowance and be subject to a 60% marginal tax charge.
Potential tax bill
If appropriate, it may be more tax-efficient to withdraw the money over a number of years to minimise a potential tax bill. If your pension provider is uncooperative because the contract does not permit this facility, you may want to consider moving pension providers. You need to prepare and start early to assess your own financial situation. Some providers may take months to process pension transfers, so you'll need time to do your research.
Questions to ask
It's important to ask yourself some pertinent questions. Are there any penalties for taking the money early? Are these worth paying for or can they be avoided by waiting? Are there any special benefits such as a higher tax-free? Is there a cash entitlement or guaranteed annuity rates that would be worth keeping? If you decide, after receiving professional advice, that moving providers is the right thing to do, then we can help you search the market for a provider who will allow flexible access. Importantly, it's not all about the process. You also need to think about the end results.
What do you want to do with the money once you've withdrawn it? You may have earmarked some to spend on a treat, but most people want to keep the money saved for their retirement. Paying off debt is usually a good idea. If you plan just to put the money in the bank, you must remember you will be taxed on the interest. With returns on cash at paltry levels, you might be better keeping it in a pension until you need to spend it. Furthermore, this may also save on inheritance tax.
Finally, expect queues in April 2015.There's likely to be a backlog of people who've put off doing anything with their Long Term Care Changes.
Today, the cost of care is a major concern for many people, with the average level of pension savings unlikely to be enough to cover any long-term care requirements in addition to providing a retirement income.
Catching people off guard
So why is care fee planning catching so many people off guard? Well, besides the fact that few of us like to think of ourselves going into long-term care in our old age, there are a number of other reasons. As we can now expect to live for 20 or 30 years beyond our selected retirement age, it becomes more likely that we will need specialist care in our later years.
Moreover, research compiled by the Institute and Faculty of Actuaries shows that while life expectancy has been increasing, healthy or disability-free life expectancy for both men and women has not nearly kept pace, leaving more people needing long-term care.
The need for care fee planning
Estimates are that one in three women and one in four men aged 65 today are likely to need care. Even more relevant for long-term care is the number of over-85s, which is expected to more than double in the next 20 years . Meanwhile, incidences of dementia are rising. It is forecast that the number of people in England and Wales aged 65 and over with dementia will increase by over 80% between 2010 and 2030, to 1.96 million.
These individuals will all need specialist care. As it stands, the average cost of dementia care per person is more than the average UK salary. In 2008, dementia cost the UK economy £23 billion – more than the costs of cancer and heart disease combined.
Introducing a cap on care costs
Under the Government's new Care Bill, a cap on care costs will be introduced to prevent people paying more than £72,000 towards their own care. But while the care cap offers a safety net that will prevent some individuals from facing significant care costs, it will not replace savings as the key means of paying for care.
The cap only applies to local authority set care costs – it does not take account of daily living costs or top-up care costs. With or without government support, it makes sense to plan for the unforeseen cost of care, not least because there is no specific savings product for care home fees. If you are not yet retired, start by drawing up a financial plan which includes the potential cost of care.
Allowing you much greater freedom
The good news is that this year's Budget changes allow you much greater freedom as to how you utilise your pension savings, enabling the money to be used for other purposes. Even if you end up not needing the money, saving something extra into your pension for the possibility of long term care will mean the added bonus of a bigger pension pot.
You could also choose to use your annual New Individual Savings Account (NISA) allowance for this purpose. You will have instant access to your savings when you need it, which you can draw tax-efficiently.
These can help ensure you have a regular income that can help with the burden of care fees while not eating into your original capital.
 Office for National Statistics, 2013.
 Lords Select Committee on Public
Service and Demographic Change, 2013.
 Carers UK, 2012.