The Pitfalls of Pension DIY
By Ross Glanfield
If you’re thinking about retirement but the idea of trying to decipher the multiple pension schemes you’ve accumulated has the same level of interest as learning Attic Greek, read on. Hopefully this article will help you to realise that help is at hand.
In 2006, Pensions Simplification merged eight pension regimes into one. It was a noble idea except that all previous regimes were protected. Since then, we have had more changes to pensions than simplification removed: increases to the State Pension Age; the triple lock; pensions freedom; increases, reductions and the abolition of the Lifetime Allowance; and multiple changes to annual allowances. No wonder most potential retirees are head-scratchingly confused.
Let’s walk through the minefield of DIY pension planning.
Defined Benefit Pensions – these gold-plated pensions come with an array of complications – early retirement penalties, late retirement enhancements, exchanging income for tax-free cash, and spouses and dependents pensions. Advice is rarely available from the provider but luckily you cannot mistakenly transfer without advice if the transfer value is over £30,000.
Company Pensions (pre-2006) – these schemes sometimes have protected retirement ages and enhanced tax-free lump sums. The downsides are retirement options can be restricted to an annuity, or a lump sum payment and the enhancements will be lost on transfer.
The schemes can also contain guarantees from contracting out of SERPS known as Guaranteed Minimum Pension (GMP). This is effectively a final salary pension, and the benefits will be lost on transfer.
Group Personal Pensions/Auto-Enrolment schemes – these schemes often have discounted charges so can appear good value. However, many GPPs only permit accumulation so it may be necessary to transfer to a different contract to facilitate drawdown resulting in the loss of the discounts.
Personal Pensions – some pensions still have historic charging structures including funded initial commissions which look like transfer penalties and huge bid:offer spreads for new contributions.
Having assessed the suitability of each contract, there is the (not insignificant) decision whether to buy an annuity or elect for drawdown. The latter is likely to involve merging the schemes into an existing account or a new SIPP.
In April 2024, we saw the abolition of the Lifetime Allowance (LTA) and the introduction of the Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA). If you have taken a tax-free lump sum out of your pensions before the LTA change, and you take another one now, you may inadvertently affect the tax-free lump sum that your beneficiaries will receive on death.
The final complication introduced in the last Budget and effective from 2027 was to make pensions part of an estate on death. The perceived wisdom prior to this was to leave pensions intact as estate planning vehicles. Now they will be subject to Inheritance Tax and then Income Tax when drawn down by the beneficiaries.
If you are still staring blankly at a pile of undecipherable pensions and the Beginners Guide to Attic Greek, call LIFT-Financial as deciphering the language of pensions is what we do for a living.