New Rules About Pensions
There is now much greater flexibility in how you can draw money from your pension savings. 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 than 55, for instance, if you are retiring on ill-health grounds, have a protected retirement age or have a special occupation such as sports, dancing, modelling or diving.
If you are over 55, 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 or 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. Normally you can take 25% of the fund as tax free cash and then you will pay income tax at your marginal rate (the highest rate of tax you pay in that tax year) on anything withdrawn from your defined contribution pension – either 0%, 20%, 40% or 45%. It is important to carefully plan as withdrawals spread over a number of years are likely to significantly reduce the tax you will pay.
Pensions are also much better on death than before. The Chancellor has reduced the tax from 55% to nil should you die before your 75th birthday leaving a defined contribution pension pot. This good news only applies to drawdown pension funds that are paid as a lump sum from 6 April 2015 to an individuals beneficiaries on death before 75 – a nil rate already applied where the funds had not been touched.
If you are over 75 and die leaving a pension pot then any beneficiary will have to pay income tax on any withdrawals at their marginal rate (i.e. the highest rate of income tax that they pay). This makes pensions a potentially important inheritance tax planning vehicle alongside its role in retirement planning.
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 www.pensionsadvisoryservice.org.uk/pension-problems/making-a-complaint/common-concerns/pension-scams.
We strongly recommend you seek advice if you are at all unsure of your retirement planning choices.
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