Saving for the future is imperative, which is why the government introduced radical changes to pensions in April 2015: to encourage people to plan more for retirement and take greater control of their financial future.
Freedom on withdrawing your pension
Before pension changes: In many cases, only the 25% tax-free part of your pension could be taken out as a lump sum.
After pension changes: With the newfound freedoms in place, you can withdraw as much of your pension as you like as a lump sum, providing you have a defined contribution pension and are 55 or above – increasing to 57 in 2028. However only 25% is tax-free and for the remaining 75%, you pay income tax at your highest marginal rate.
More accessibility when investing into a pension
Before pension changes: If you wanted to keep your pension invested via a drawdown option (with no limits on the amount that could be withdrawn), you had to have alternative sources of guaranteed income you could rely on, totalling at least £12,000.
After pension changes: To invest through a drawdown option, there is no longer a minimum guaranteed income requirement.
Drawdown offers the flexibility to choose to opt for an income or make withdrawals from your pension, as and when you require, whilst the rest of your money remains invested. However it's important to consider the fact that with drawdown, the value of your fund can fall as well as rise, and that taking too high a level of income could exhaust your pension completely.
If you're contemplating keeping your pension invested, it is strongly recommended that you seek financial advice.
Annuity products more flexible
Before pension changes: Annuity products lacked flexibility, whilst average rates have fallen in recent years.
After pension changes: Some restrictions on annuity products have now been removed to make them much more flexible, enabling providers to develop improved products offering a wider variety of options.
As there are many annuity options to choose from, it is advisable that you shop around as opposed to selecting the first one your provider offers.
55% tax charge on transferring your pension will no longer apply
Before pension changes: If you had crystallised your pension (that is drawn an income or taken as a lump sum) or you died over the age of 75, your remaining fund could be passed to your beneficiaries – but only after incurring a 55% tax charge.
After pension changes: This rule has been scrapped. If you die before reaching 75, your beneficiaries will no longer have to pay any tax in receipt of your pension, even if you have already started taking funds from the pension (providing it's under your Lifetime Allowance).
If you die over 75, your nominated beneficiaries will have to pay income tax at their highest marginal rate when they make withdrawals from the funds, unless it occurs between April 2015 and April 2016, where a 45% tax rate will apply if taken as a lump sum.
We offer personalised financial advice and can discuss the new rules, how you might be able to benefit and the potential pitfalls to avoid.
For retirement solutions such as drawdown, your capital is at risk so you may get back less than you originally invested. The value of investments and the income from them may fall as well as rise. If you take too much income too quickly your fund could become depleted or run out altogether. The tax treatment of your investments depends on your individual circumstances and prevailing legislation, both of which may change in the future. There are a number of tax considerations for withdrawing your pension fund as a lump sum and you should seek financial advice before making any decisions.