Changes introduced in April 2015 now mean you have more choice and flexibility in deciding how and when to use your pension pot. But increased pension pot options could result in poor decisions and confusion, and therefore it is essential to get good advice before doing anything. Here I share the new pension rules, tax implications and what these pension freedoms mean to you:
New Pensions Rules – A Summary
You must have reached normal pension age (55 years) to access your pension pot
No Need to Buy An Annuity: The first radical change to pension rules is that now you can do what you like with your pension pot – no one can force you to buy an annuity! From the point of retirement you can access your defined contribution (DC) pension, and do what you want with it.
25% Tax Free Lump Sum: However you choose to use your pension pot everyone can take a 25% tax free lump sum to spend or invest in whatever way they choose. You can also take smaller cash sums out of your pot to be spent or invested elsewhere. For each withdrawal 25% will be tax free, the rest will be taxed at your highest tax rate by adding it to the rest of your income. There may be charges for each withdrawal and limits on how many withdrawals you can make each year.
Delay Taking Your Pension Pot: Just because you’ve reached retirement age doesn’t mean you have to take your pension pot. If you have sufficient income you could leave your pot untouched and allow it to continue to grow tax-free. You’ll need to check with your pension provider that there are no charges or restrictions if you wish to change your retirement date.
Guaranteed Income: Of course, some people will want the guaranteed income that an annuity can provide, you still can. For example, with a £100,000 pension pot you could take £25,000 as a tax free lump sum and spend the remaining £75,000 on an annuity. Or you could choose to spend just 50% of your pension pot on an annuity and leave the rest invested in the stock market for a later date.
Flexi-Access Drawdown: If you do not wish to buy an annuity you can now use your pension pot to invest in funds to provide a taxable income. The new regulations mean there is no longer a minimum income requirement therefore opening this option up to individuals with more modest pension pots.
Anyone in a ‘capped’ drawdown scheme can convert to a flexi-access drawdown by contacting their pension provider.
Cash In Your Whole Pot: You can also take your entire pension pot in one go. 25% would be tax free, 75% taxed at your highest rate. Of course you run the risk of running out of money for your retirement if you do this, and it might leave your dependants without any financial support after you die. Furthermore you are likely to face a hefty tax bill. Take some financial advice and plan your retirement carefully if you are considering this option.
Death Benefits: The new regulations now mean that beneficiaries can now take a lump sum, or income, tax free if you die before 75 years old, and at the beneficiaries’ marginal rate if you die after 75.
Final Salary Pensions: If you have a final salary pension you can take advantage of these new rules by moving your funds into a defined contribution pension. However you could lose benefits such as a guaranteed income linked to inflation and therefore it is important to get financial advice and weigh up the pros and cons.
While the new flexible rules mean that you can mix and match options to suit your lifestyle and requirements during your retirement, there are a number of considerations to take into account. Before taking your pension pot it is therefore advisable to get financial advice.
The Government, through the Pensions Advisory Service (TPAS) and Citizens Advice, are offering all over 55s a free, impartial service to discuss the options available. Pension Wise can be delivered online, over the phone or face-to-face. Although this may be of interest to you, the Pension Wise service is not intended to be a substitute for full financial advice.