Protecting your pension pot

On the 6th April, the most talked about changes in pension legislation became law.

The biggest adjustment will be how the majority of money purchase pensions in existence can be accessed. Up until these pension reforms were announced, only individuals with at least £20,000 of guaranteed income had access to the entire value of their money purchase pensions but from April, anybody will be able to take the full value of their fund providing they are aged 55 or over.

What to consider

If you decide to draw your fund in one tranche, there are some considerations to bear in mind. For example, as before, 25% of your fund will be tax free. However, the rest of the fund will be treated as income. As any income over £41,865 is taxed at 40%, you may inadvertently pay income tax at 40% of some of the pension fund you have just withdrawn.

Pensions have always been a tax deferred savings vehicle, as you would have received tax relief on the contributions. The skill has always been to achieve higher tax relief on the contributions than you pay when you draw the income.

You should also be aware that pensions will not be subject to inheritance tax under the new regime.

What to watch out for

The Financial Conduct Authority has expressed concern that fraudsters are likely to prey on people in the weeks that follow so-called ‘pension freedom day’ to take advantage of people’s uncertainty and a surge in demand for flexible retirement products.

A national study by MetLife shows that almost one in ten pensioners have been targeted by fraudsters during their retirement and nine per cent of retirees say they have been victims of financial scams or targeted by financial scammers since they stopped work.

Reported frauds have ranged from attempting to gain access to bank or savings accounts through so-called ‘vishing scams’, where people are tricked into handing over bank and card details, to selling bogus investment and pension schemes.

Advice

My advice is to never get involved in anything exotic or esoteric. The best investments are simple. As soon as your adviser starts talking about alternative asset classes, investment ‘opportunities’ or products which offer high returns with low risk, just say NO.

The most important thing to remember is to apply common-sense to your financial decisions. Never rush your decisions. If someone is placing you under a time pressure to make a decision, walk away.

So how do you avoid becoming a victim of fraud? It is worth considering the old adage, ‘If it sounds too good to be true, it probably is’.

You should also always check whether an adviser is who they say they are. The Financial Services Registrar confirms whether the adviser is authorised to give advice and it is always worth choosing an adviser that is either a Certified Financial Planner or a Chartered Financial Planner.

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