First announced in the 2014 Budget, the pension freedom reforms give more flexibility in how you spend your pension pot than ever before, and that means it’s vital you understand the new options open to you. But just what do the pension freedoms mean? Read on to find the six key things you need to know about the freedoms and what they mean for you.
Those aged 55 and over with a defined contribution pension can access their savings as they wish. You’re in complete control of how you spend your cash, with prohibitive tax charges reduced and income drawdown limits amended. You can still take the first 25% as a tax-free lump sum. Please note, however, that this minimum age will increase from 55 to 57 by 2028, so this is affect those who will be 55 or 56 and hoping to take their retirement benefits in 2028.
If you are 55 or over and own your own home, you could consider using equity release to significantly boost your retirement income. You can normally release up to 40% of the value of your home and continue to live there, usually without having to make any repayments.
The previous system meant that the majority of pension savers had no option but to purchase an annuity when the time came, either because of the tax charges associated with withdrawal or the fact that their income was too low to consider drawdown. You’re no longer obliged to opt for annuities unless you want to (remember that an annuity is still the only option that will guarantee you an income for the rest of your life).
Income drawdown is a way to take a regular income from your pot while keeping the rest invested, and the changes mean more people can take advantage of this option: the amount of guaranteed income you’ll need to access flexible drawdown (where you’re allowed to take as much as you like from your pot) reduced from £20,000 to £12,000, and capped drawdown limits have also been changed, with the maximum amount you can withdraw from your pot each year now standing at 150% of an equivalent annuity.
A further form of drawdown has also come to pass – known as ‘Uncrystallised Fund Pension Lump Sums’ (UFPLS), it allows you to take regular payments from your pension fund. You can take cash directly from your pot and essentially use it like a bank account, with the first 25% of each payment being tax-free and the rest being taxed as income.
Everyone still has the chance to access the first 25% of their pot tax-free, but the tax charges associated with taking more than that have been reduced. You are now free to withdraw the rest of it in one go and will be taxed at your nominal income rate (20% for a basic rate taxpayer, 40% for a higher rate and 45% for an additional rate taxpayer), rather than at the previous level of 55%.
While the pension freedoms offer more flexibility than the previous system, they also pose more risks. You can read more about them here, but one thing you need to be particularly vigilant about is pension scams. Anyone who contacts you regarding ways to re-invest your pension savings should be regarded with extreme caution, and if in doubt, contact the industry regulator to make sure the firm in question is legitimate. Read more about the risk of pension scams and who to contact here. It is now illegal to make a cold call regarding a pension, so if you receive one, it will be a scam
If you’re approaching retirement age, you’ll want to get all the support you can when deciding how to spend your pension pot. It’ll affect how you secure an income for the rest of your life so it’s vital you understand the options, and luckily the Government has stepped in to help. Pension Wise is a free, impartial guidance service that can give you information about turning your pension pot into an income, giving you a thorough grounding in the options available. It’ll also point you in the direction of professional, independent advice, something that should always be sought to ensure you make the decision that’s right for you.
So, there you have it! The key points you need to know about the pension freedoms. Of course, there’s far more to it than can be covered here, so make sure you read our guides for more information and contact Pension Wise when the time comes. One final point to bear in mind – you don’t have to decide right now!
Knowing how you’ll secure a retirement income is a huge decision and the pension industry itself is still adjusting to the new landscape – new products could become available and your thoughts may change in the months to come, so if you don’t have to make a decision just yet, don’t feel that you have to rush in. Make sure you get all the information you need, and then you can use the pension freedoms to your advantage to secure the retirement income that’s right for you.
The pension freedoms, introduced on 6 April 2015, have given retirees a whole host of new options.
But, there is also a new set of risks for people to consider, as some decisions about how pension pots are used cannot be undone at a later date. Choose poorly and it could reduce the income you receive for the rest of your life, so it's vital to understand the risks involved as well as the benefits.
As part of that, pension providers will have a responsibility to ensure you get the right advice. Under rules set by the Financial Conduct Authority (FCA), providers are required to refer customers to the Government's Pension Wise guidance service, or to an authorised financial adviser. They will also have to detail to customers what the risks are of their chosen method for turning their pension pots into income.
And different options have different risks.
The main options at retirement will be:
In these guides, we outline the typical risks for you to think about for each option.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.