Pensions are being radically transformed under plans announced in the 2014 Budget. From April 2015, retirees will be given far more freedom over how they use their pension fund. Here we explain how the forthcoming changes could affect you.
How are pensions changing?
The most radical changes will come into force in April 2015. Upon reaching retirement age, savers will have access to all the money in their pension pots and will, after tax, be able to do more or less what they want with it.
Under current rules, savers can take up to 25% of their pension pot as a tax free lump sum upon retirement. If you want to take a larger lump sum, you can, but if you go above certain limits you have to pay a 55% tax.
Under the new rules, this facility will remain but the tax on withdrawing the rest of the cash will also be cut to standard income tax rates, making it easier for people to use their entire fund as they wish.
What are the benefits?
- Freedom to use your pension fund however you choose – whether you want to pay off your mortgage, clear your debts, or invest in a buy to let property, the choice is yours.
- No ties ins – you won’t be required to buy an annuity.
- Free pensions advice – the Government has promised a £20m fund to pay for free, impartial, face-to-face pensions advice for everyone approaching retirement.
What are the drawbacks?
- Making the right decision for you could present a challenge, as you need to estimate roughly how long you are likely to live as well as working out the best way of investing your money.
- Many people are not especially confident financially and could find the array of choice confusing. Already in the annuity market, according to research from moneysavingexpert, around 60% of people take their pension provider’s annuity offer, rather than shopping around to find the best rates. While the free advice service offered by the Government should help with this, it’s likely that many people may find the new-found pension freedom a little overwhelming at first glance.
I already have a pension – how will the changes affect me?
The good news for those who already have a pension is that from March 27, the Government is introducing arrangements to give savers greater access to their pensions. These changes include:
- Savers whose total pension savings amount to £30,000 – rather than £18,000 – will be able to take the entirety as cash, taxed at marginal rates.
- Savers who use income drawdown will be allowed to take larger sums as income. The capped drawdown limit will increase from 120% to 150%.
- You will need just £12,000 of secured pension income from other sources to make unlimited withdrawals through flexible drawdown (a major fall from the current limit of £20,000).
Will I still be able to buy an annuity?
If you want the security of a guaranteed income for life, you will still have the option of purchasing an annuity – but because annuities will no longer the sole option at retirement, providers will be forced to compete with other pension options. Therefore, it’s possible that better rates will become available for those who do wish to go down the annuity route with their pensions.
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