Associate Insight - Pension changes April 2015: Five things every lawyer should understand about the new rules

On 6 April, the biggest pensions-shake up in history will come into effect and Wesleyan, the specialist financial services provider for professionals, has come up with five issues every lawyer approaching retirement needs to consider.

Anyone with a defined contribution (DC) pension scheme will be affected by these extensive pension reforms.

The opportunity for individuals to take their entire pension pot as a cash lump sum for the first time is arguably the biggest, and most heavily publicised, new pension rule. But new tax implications and different arrangements among pension providers are just a few of the reasons why these reforms may be more complicated than pension savers expect.

1. Do not assume that taking a lump sum is the best, or easiest, choice. The cash option may sound remarkably simple, and tempting, compared with shopping around for an annuity. While the new pension rules give people more freedom in retirement, this freedom comes with greater choice, which has its own complications.

2. Not every DC pension provider will offer the new flexibilities. Pension providers do not have to adopt the new flexibilities, so it is essential that pension savers look into this as they may have to switch providers. Changing pension providers can be a lengthy process, so lawyers should consider taking action now if they wish to take advantage of the new pension arrangements early on.

3. Taking a pension pot as cash could affect the amount of tax payable. Under the new pension rules, if someone opts to take their entire pension as cash, a quarter of this can usually be withdrawn tax free. However the rest is treated as income and is taxed at marginal rates. So depending on the size of their pension pot, lawyers could actually find themselves pushed into a higher-rate tax band.

4. What to do with the lump sum? One of the options is to invest the cash. But deciding exactly when, where and how much money to invest in practice is complicated by the choices open to investors and the need to balance risk and reward. Seeking out professional advice can help lawyers navigate the investment landscape and make sure they get the most out of their pension pot.

5. Could an annuity actually still be the best option? Despite some criticism around their value, annuities will still provide security of a regular income over a lifetime that cannot be guaranteed by taking a cash lump sum or investing the money yourself.

Samantha Porter, Wesleyan's Group Sales and Marketing Director, said: "There is no doubt that this year's pension reforms will bring more choice for customers, which is to be welcomed. However it's important to make the right decisions, as after a long career lawyers will want to ensure they have sufficient income to enjoy the retirement they want. They should discuss all of the options available to them with a financial services specialist who understands their profession.

"Lawyers should not rush into any decisions over their pension savings. But they also need to establish if and when to take the right actions, which requires careful consideration of all options available to them, preferably with the support of a professional who understands the specific needs and challenges of their profession."