The table below summarises the key changes announced by the Government:
||Before April 6 2015
||From April 6 2015
||One time opportunity to take 25% as tax-free cash – at point of taking pension as annuity or income drawdown.
||Greater flexibility. Partial withdrawals can also be taken with each withdrawal having. The first 25% is tax-free.
|Accessing pension at 55 (Tax-free cash aside)
||Pension had to either be taken via annuity or income drawdown.
Complete freedom. Either:
- Cash in pension in full
- Cash in pension on an ad-hoc basis
- Or take regular income via income drawdown or an annuity
Withdrawals over and above the 25% tax-free amount are subject to marginal rate of income tax.
|Tax charge when ‘passing on’ pension
- If you die before 75 your pension can be passed on as tax-free lump sum so long as you haven’t taken any tax-free cash or income.
- In all other cases, a 55% tax charge is applied.
The tax charge and options available to your beneficiary/ies depends on your age at death.
If you die before 75:
Tax-free either as:
- tax-free lump sum
- regular income via annuity or income drawdown
If you die after you:
- Withdraw the whole fund in one lump sum payment, subject to a 45% tax rate (although this may change to the marginal income tax rate of the beneficiary in future years).
- Withdraw income through income drawdown or an annuity, taxed at the marginal income tax rate of the beneficiary.
- Take periodic lump sums through income drawdown, again subject to the marginal income tax rate of the beneficiary.
As the table above shows, the pension reforms will have a significant impact on your retirement options.
In recognition of the vast changes the Government have made a pledge to offer free support to help you make sense of your options at retirement. The Citizens Advice Bureau, Pensions Advisory Service and Pension Wise will be providing this for free and all pension providers will be obliged to inform you of this.
The new system means that individuals have greater responsibility to ensure their pension savings provide a reliable income in retirement. The pre-April 2015 rules were largely designed to ensure that savers didn’t run out of money, for example by taking too much income from their drawdown investments, or by cashing in and spending their funds. But under the new rules, people will have far more freedom to use their savings in whatever way they choose.
Some savers may well choose to combine an annuity with drawdown, using part of their fund for each – thereby securing an element of guaranteed income, while allowing the other part to remain invested and potentially grow.
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Generally speaking, you can only take advantage of the pension rule changes after you have turned 55, although there can be exceptions made for people in very poor health. This age limit rule is not changing.
If your pension is a final-salary scheme from an employer in the private or public sector, these changes will not affect you: your pension will still be used to provide a defined income in retirement.
However, you will be able to transfer your final-salary pension into a fund that you can then use in the ways described above, if the scheme is a private sector or funded public sector scheme. Although, please remember that it is likely that you will lose valuable benefits in doing so and you should always seek professional financial advice before proceeding down this avenue.
Even if you are some distance from retirement, the changes are likely to affect you.
The increased flexibility is expected to make saving into a pension more attractive. It is thought that the strict rules on taking pensions have acted as a disincentive for some people to save into a pension, as they have been worried their money will be tied up and their choice over how to use it limited. This should no longer be the case.
The government has also removed taxes payable on certain types of annuity (joint life and guaranteed annuities) to beneficiaries who inherit pensions if the holder dies before 75. This is expected to further add to the appeal of pension saving.
The reforms may also affect the investments you choose for your pension.
Under the old system, many pension plans offered investments designed to gradually reduce risk – for example by switching from shares to bonds and cash – as the holder approached their retirement date. This was to ensure that their fund didn’t suddenly lose value due to stock-market falls immediately before an annuity was purchased.
With more people expected to keep some or all of their pensions invested post-retirement, it may be appropriate for investors to re-evaluate their investment strategy.