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Know your options before you decide

By Western Daily Press  |  Posted: April 12, 2014

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I am due to retire later this year and I have a pension fund worth around £28,000. I have no other pension plans but I will be entitled to the state pension. I was originally going to withdraw 25 per cent of my pension pot tax free and use the rest to buy an annuity but I don't know if the new rules regarding annuities will apply to me and whether I now have other options. What should I do?

Ray Black, IFA and founder of Money-minder.com, says…

As a result of the radical announcements in the recent Budget, from March this year there are significant changes to the ways people can access their pension funds.

As long as this is your only pension fund, and because it is below the new £30,000 threshold, it is now possible for you to draw out the whole amount without having to buy an annuity with 75 per cent of the fund value as you would have previously needed to do.

However, you'll need to pay tax at your marginal rate on the amount left over once you have taken your 25 per cent tax free cash entitlement.

This means that if you expect to pay income tax at 20 per cent on your normal income, once you have withdrawn your maximum 25 per cent in cash, you will also have to pay 20 per cent tax on any further cash you withdraw from your pension pot.

Before you jump in feet first and arrange for your pension provider to pay all of your pension pot out to you in one go, you should first compare this option to that of buying a guaranteed income for the rest of your life, (as you were expecting to before these changes were announced).

Annuities, of course, do give you the security of knowing that you will receive an income for life and they can also provide a continuing income for your partner should you die first.

You should get in touch with your pension provider to ask for quotes and paperwork for both options but remember to compare the annuities on offer from different providers.

If you have a serious health condition, you smoke or are overweight you may get a better annuity rate than someone in good health.

Think hard before you make your final decision, just because you can do something, it does not mean that in all cases it's the right thing to do. You might find that drawing out the "residual" fund after you've taken the tax-free cash could mean that you would have an exceptionally high tax bill that you might otherwise be able to avoid.

If you're unsure what's best for you, talk to an independent financial adviser who can ensure that any investment decision you make remains in line with your attitude to risk and is suited to your overall investment goals. Your adviser should also talk you through the pros and cons of other investment options.

Ray Black is an independent financial adviser and managing director of the innovative financial comparison and guidance website www.money-minder.com

He also runs an IFA practice of the same name in Sleaford, Lincolnshire, with his wife Karron.

He began his career in financial services in 1992 when he joined the Prudential as a financial consultant.

After seven years and having become a top performer and expert in the fields of pensions, investments and annuities, he left the Prudential to become an independent financial adviser. In June 1999 he and Karron founded Money-Minder.

Although Money-minder.com has an innovative and unique service for comparing life insurance and protection products online, Mr Black's face-to-face business predominantly deals with investment and pension advice.

With many clients being retired or close to retirement, Mr Black and his team have the responsibility of giving sound advice and guidance to people managing their lifetime wealth.

Money Minder Financial Services (UK) limited is authorised and regulated by the Financial Conduct Authority (FSA).

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