Retirees are being warned to be wary of charges applied to pension funds being used ‘like a cash machine’. Pension savers can face charges of up to £240 a time for accessing their pension pots in such a fashion. In some cases, charges can reach up to £300 a year when regular amounts of cash are withdrawn from pension pots. Alternatively, pensioners could also have 1% cropped form their savings alongside additional fees for taking out their cash.
Nevertheless, these charges are not applicable across the market as some firms request just one minimal annual charge. This can be as low as 0.1% at places such as Aviva where they offer no extra costs either. Therefore, your choice in pension provider could ultimately cost or save you thousands of pounds over the course of your retirement.
Annuities Still Appealing
Under the previous regime pensioners were allowed to take 25% of each lump sum pension pot completely tax free. This money is paid out as a lump sum when pensioners first start to take that pension. But under the new rules pensioners now have the option to take a tax-free 25% every single time they draw money from their pension pots. So if you withdraw $80,000 in one year, £20,000 of that will be tax free.
In the past, many people have bought an annuity in retirement to ensure they have an agreed income for life. Under new pension freedoms you no longer have to do this, but that doesn’t mean many people will give up on using an annuity. It is expected to remain a popular option as pensioners are guaranteed a payout no matter the circumstance of age. If you do wish to pursue this option though you will have to take your 25% tax free as a lump sum, much like it was previously.
Using Your Pot Like an ATM
As mentioned previously, if you do not wish to take your 25% tax free as a lump sum, you can instead choose to withdraw bits at a time and take 25% tax free each time. So for example, if you have a pension pot of £80,000, you may decide to withdraw £20,000, of which £5,000 will be tax free. Tax on the remaining amount is payable at their marginal rate. The actual name for this process is called ‘Uncrystallised Fund Pension Lump Sum’.
This method allows you to access your pension much like an ATM as you can access your funds as and when you please. However, transactions like this are chargeable and the rate or charge will largely depend on your pension provider. Regular high charges can rack up to a significant loss over time, so pensioner must be wary of how frivolous they are with their withdrawals.
Many are looking into their investment options since the pension reforms came into practice on April 6th. Wellesley & Co offer rates of return up to 6%, and are the fastest growing peer-to-peer lender of 2014. Placing your entire pension into Peer to Peer lending is not advised as your capital and interest payments are at risk if a borrower defaults. It is also not covered by the Financial Services Compensation Scheme.
Precautionary steps are taken at Wellesley & Co to ensure that the risk involved in managed. We only take part in asset backed lending, retain a portion of each loan once made, offer a discretionary provision fund and ensure that lenders have the highest level of diversification possible. Defaults can occur, and we have processes in place to minimise the impact if this were to happen. Primarily this is controlled through assets that are held as security on every single loan. In the event that a borrower was unable to repay a loan. Wellesley Finance would attempt to recover the funds outstanding. However such security agreements do not guarantee full return of capital and interest.