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Pension Freedom April 2015

Since 6 April 2015, those with defined contribution pensions who have reached the minimum pension age (currently 55) will have the option to take a tax free-lump sum and a lifetime annuity. However some of the restrictions on a lifetime annuity wil be removed to allow more choice on the type of annuity taken out.

The minimum pension age will be increased from 55 to 57 in 2028.

The value of pension and the income they produce can fall as well as rise. You may get back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.

Transferring out of a Final Salary scheme is unlikely to be in the best interests of most people.

Any enquires for defined benefit or final salary pension advice will be referred to an appropriately qualified adviser.




Pension Tax

You can choose to take pension benefits from personal pensions without buying an annuity.

The first 25% will be tax free; the rest will be subject to income tax. The money you take from your pension pot is considered an income, so is taxed in the same way as your salary. Once you've taken your tax-free lump sum, any money taken from your pension pot is added to other income you receive in the tax year you take it. This includes paid work, taxable income from additional pension pots and your State Pension.




Income Drawdown

Income Drawdown offers greater flexibility - allowing you to take tax-free cash and an income from your pension funds without buying an annuity.

Basic-rate tax payers need to be aware that any drawdown from their pension will be added to their other income and could result in them paying tax at 40% or even 45%.

You can choose to take your pension in stages, rather than in one go, which can help with your tax liability. It should also be possible to take the tax-free cash straightaway and the taxable income at a later date.

It's important to carefully plan your annual drawdowns to ensure you don't spend it too soon. If you don't manage your income you could very easily run out of money from your pension pot. If your pension pot is the basis for your main income in retirement, think carefully about taking too much too soon. Unlike with an annuity, drawdown doesn't guarantee you an income for life.

Find out more on Income Drawdown




Annuities

A conventional annuity has been the simplest and most popular form of converting a pension into an income. It is a very simple product, and the basics are reasonably easy : in simple terms, a financial adviser is able to source you with an income for life (annuity) using your pension.

Find out more about Annuities



Restrictions on how much you can contribute

Once you start drawing a pension, there will be restrictions on how much you can contribute in future. With the new pension freedoms are measures designed to prevent investors making excessive contributions at retirement. This is done by reducing how much they can contribute to pensions each year, from £40,000 to £10,000.

From April 2015: If you draw-down from a “pension pot” worth more than £10,000, your annual allowance will be reduced to £10,000.




Pension Transfers

Individuals will have the right to transfer between defined contribution schemes up to the point of retirement. Transfers from private sector and funded public sector defined benefit schemes will be allowed but investors must take advice from a professional financial adviser.

Transferring out of a Final Salary Scheme is unlikely to be in the best interest of most people.




Pension Freedom - Summing up

What was the main change to Pensions in April 2015?

Previously savers didn't have full flexibility when accessing their defined contribution pension during their retirement; they were charged 55% tax if they withdrew the whole pot.

Savers have always been able to take 25% of their pension in a tax-free lump sum, but have then usually purchased an annuity with all of the rest of the money. From April 2015, savers over the age of 55 will be given the option of taking a number of smaller lump sums, instead of one single big lump sum, and in each case, 25% of the sum will be tax-free.

Since 6th April 2015, those with defined contribution pensions who are at least 55 still have the option to take a tax free lump sum and a lifetime annuity. However there are now more options to consider in providing an income.

For example, you (or your partner) might choose to :

  • take the whole amount as a lump sum
  • take a number of lump sums out
  • arrange “flexible drawdowns”, where lump sums or regular payments can be drawn down, or
  • buy an annuity.