Lawyers warned about new pension freedoms

Financial services provider, Wesleyan, has warned that the tax implications of accessing pension savings and the different arrangements among pension providers have not been as widely publicised as the new freedoms, which could lead to a loss of income in retirement.

As a result of the reforms which come into effect in exactly three months, those who save into a defined contribution pension scheme will be able to withdraw their whole pension pot when they reach the age of 55.

Wesleyan believes that the long-term consequences of this may be lost on some legal practitioners.

Samantha Porter, Wesleyan's group sales and marketing manager said: "There is no doubt that next year's [2015] 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. Lawyers should not rush into any decisions over their pension savings.

"They should discuss all of the options available to them with a financial services specialist who understands their profession. 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."

The financial services provider has issued a five point list which it believes every lawyer should understand about the reforms, listed below.

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 defined contribution 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, 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.

The new pension freedoms come into effect on 6 April 2015.

Binyamin Ali is assistant editor of Private Client Adviser