Pensions have always been one of the most inflexible financial products. At the moment you can’t usually get access to them until you reach age 55, and at that point you are able to take a 25% tax free lump sum and then have restrictions on what you can do with the remaining 75%.
In the future it looks like the restrictions you had with this remaining 75% are being removed. It appears you can take it all out if you wish and do with it whatever you like. Whether that be to wisely help fund your retirement, spend it on something you need or want now or to waste it. As any money you withdraw from the remainder of your pension fund is taxable, you could be hit with a big tax bill if you are to withdraw an amount that puts you into the higher rate tax band.
Although a minority of people who take their money out of their pension will spend it straight away, most will look to reinvest it in a hope they are able to get a better return for their money than their pension could.
These days fund and investment choices available within a pension are very similar to that outside of a pension. Although any money taken out of a pension is taxable, it grows free of income tax and capital gains tax whilst in the pension environment. As such it will not usually make sense to take your money out of your pension and reinvest in this way and I would strongly advise not to do this unless there is real reason to do so.
Another way people may look to reinvest their pension money is by physically buying a property to let out. If it works well, this can provide good returns, but unfortunately it doesn’t always work well and should only be done by those who have the time to commit to it and the ability to take the risks which are involved.
An alternative to physically buying property could be to invest into a property investment fund via your pension. That way your money is invested into a fund which owns a selection of properties rather than just one. The risk of losing all rental income from your own and only property is vastly reduced. There are different risks involved however, and the potential rewards may not be as high, but it may be a more suitable route to invest for you depending on your own personal circumstances.
If this did sound like a more favourable option, I would usually recommend not only to invest into a property fund, but a selection of different types of funds which include property, individual company shares, corporate bonds, gilts and other asset classes.
A balanced investment portfolio should be spread across many different assets, asset types, geographical locations and business sectors in order to spread investment risk. By investing into assets held in different countries, you reduce the risk of suffering large losses due to one country’s economy declining. This risk can only be reduced by diversification but not eliminated, as global economic crisis can affect every country in the world.
The new rules which come in to force this year have opened a can of worms, and consumers are at real risk from making the wrong decision thinking that because they are now able to get their money out of their pension that this is the right option. As always professional advice should be sought before acting upon any changes to your pension and investment arrangements.
Jason Hinde DipPFS
2nd February 2015
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