Much attention has been given to high earners being those who will be most affected after A-Day, however, amendments made after 6 April 2006 will leave more and more people requiring ‘sensible' pensions advice, says Bee.
Head of pensions strategy at Scottish Life, Steve Bee says a key illustration of the extra advice required will relate, in particular, to how tax-free cash will work come A-Day.
Writing on his Beeline website, Bee says while most people think tax-free cash from money-purchase pension schemes after A-Day will be 25%, this is not the case as the amount which could be claimed could be up to as much as 45% of the fund, depending on how people elect to receive their retirement benefits.
Likewise, Bee adds individuals may only receive 25% for the same reason.
Bee says: “After A-Day the tax-free cash that people, with some forms of money-purchase pensions, will be entitled to will depend on the level of annuity rates at the time they retire and the type of annuity they choose.”
People selecting poor annuities may well end up with more tax-free cash than if they select more suitable annuities after 5 April 2006, he adds.
Speaking specifically about money-purchase individual, group schemes after A-Day, Bee uses the situation to promote improved pension benefits received through the 'open-market option', with encourages to shop around for the best annuity deal, or a ‘scheme pension’ which is provided by the scheme they are in.
New laws say the tax-free cash - to be renamed Pension Commencement Lump Sum - is limited to 25% for people opting for the open-market option.
People opting for the ‘scheme pension’ - the new earnings cap calculation which takes the first year's benefits and multiplies at 20:1 - will not have a 25% tax-free cash limit by the new tax laws set out in this year’s Finance Act.
The variance will depend on the annuity rate applied and the type of annuity selected for example: “Where people select single-life, level annuities as a ‘scheme pension’ they will become entitled to more tax-free cash than if they were to select a joint-life annuity with built-in increases,” Bee says.
Sample figures present a 65 year-old man with a £500,000 money purchase pot and calculating the tax-free cash for just three options open to him; an open-market option, a single-life ‘scheme pension’ guaranteed for just 5 years and a joint-life ‘scheme pension’ increasing at 5% a year and continuing on death at the rate of two thirds to his wife who is 5 years younger than him.
Under these options, the tax-free cash amounts available would be £125,000, £161,290 and £84,033 respectively.
Excluding the variances of the annual pension amounts, Bee says this illustrates the range of choices available to people after A-Day.IFAonline
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