About Pension Freedoms
On 6 April 2015, the Taxation of Pensions Act 2014 and the Finance Act 2015 introduced major changes to how pensions are taxed and to how the pension benefits can be taken, and further changes have been implemented since this date
There is now much greater flexibility in how you can draw money from your pension plan. You no longer have to buy an annuity when you retire and it is possible to take your entire pension out as cash. If you want the security of an annuity you can still purchase one and if you want more control over your finances you can drawdown your pension as and when you need it.
Pension benefits can generally be taken from age 55. The minimum pension age will increase to age 57 from 2028 and will then continue to be 10 years below the state pension age thereafter. In exceptional circumstances benefits can be taken earlier for example if you are retiring on ill-health grounds or have a protected retirement age or have a special occupation such as sports, dancing, modelling or diving.
If you are over 55 (57 from 2028), there are now essentially four main options available to you -
- Continue to leave your pension invested.
- Opt for a flexible income by drawing down your pension savings.
- Opt for a guaranteed income using an Annuity.
- Cash in part of all of your pot which may be subject to a considerable amount of tax.
The great thing about the new retirement flexibility is that you can mix any or all of the above options both now and in the future.
Since April 2015 you have been able to access and use your pension pot in any way you wish after the age of 55 (57 from 2028). Normally you can take 25% of the fund as tax free cash and then you will pay income tax at your marginal rate on anything withdrawn from your defined contribution pension. It is important to carefully plan as withdrawals spread over a number of years are likely to significantly reduce the tax you will pay.
This has also meant more options for pension death benefits on money purchase plans. There can be differences in death benefits when taken as lump sum or income (whether from annuity purchase or drawdown) where the specifics are not covered here and would need to be discussed with one of our financial advisers.
As an example, where a member dies with uncrystallised (or unused) funds and the survivor (dependent or nominee) designates these funds to a flexi-access drawdown contract, the tax situation is as follows:
Member dies before age 75
- Any income received is free of income tax, providing there is a designation made within the two-year window and where the funds are not in excess of the member’s available lifetime allowance.
- If the designation is made after this time the income is taxed as the beneficiary’s pension income via Pay As You Earn (PAYE).
Member dies aged 75 or older
- The income received is taxed as the beneficiary’s pension income via PAYE. There is no test against the members remaining lifetime allowance.
The above change make pensions an important tax planning vehicle.
Please be careful.
With the freedom to access all of your pension there will be plenty of people trying to get hold of your pension pot and some of them will inevitably be fraudulent. Please be careful with your hard-earned pension savings and think very carefully before cashing them in or moving them. If you’re offered a scheme which seems too-good-to-be-true it probably is.
For further information, see the Pensions Advisory Service's website.
We strongly recommend you seek advice if you are at all unsure of your retirement planning choices.
A PENSION IS A LONG TERM INVESTMENT THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.
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