Pension Liberation

Understanding the key changes

Under the old pension legislation, retirees’ options were limited and dependent on the size of their pension pots. The following key changes created greater choice and flexibility in pensions.

 

  • Individuals now have complete autonomy over how they choose to take income from their pension savings. They can opt for a guaranteed income for life through products such as an annuity. Alternatively, they are able to choose a flexible income, where they can start, stop and change what they withdraw, also known as drawdown. They can also choose a combination of both.

 

  • Tax rules have been simplified to give people the unrestricted access to their pension. Subject to meeting criteria, people are able to take 25% of their pension pot tax free.

 

  • Drawdown of pension income are taxed at marginal income tax rates.

 

  • Individuals can take money from their pension from the age of 55 and do not need to stop working and retire in order to access their retirement savings. They can even keep working and paying into a pension.

 

  • Those approaching retirement have access to free and impartial advice through the guidance guarantee scheme ‘Pension Wise’, to help them make informed choices. The guidance is not intended to replace professional advice but should act as a gateway to advice for those who need it.

 

  • The 55% 'death tax' on pensions has been abolished. Pension savings can be passed on to loved ones tax free, if a person dies before age 75. On death after 75, death benefits aretaxed as the recipient’s income when they drawdown the funds. For 2015/2016 only, nondrawndownlump sums will be taxed at a flat rate of 45%, but marginal income tax rate will apply thereafter.

 

  • The old tax distinction between 'crystalised' (funds in use) and 'uncrystalised' (funds that have yet to be drawn) pots has been removed, meaning that the age at death is the sole determinant of tax treatment.

 

Pensions are changing — it’s time to talk

If you’re approaching the age of 55, or you’re already taking income from a modern flexible pension, your choices about how you take money out of your pension will be revolutionised from 6th April 2015.

The new pensions landscape gives you more control over what you take out, and when. But there are traps for the unwary here and you could sleepwalk into more than one tax bill if you get it wrong.

Professional advice can help you make the right decisions for you and your loved ones. So why not invest some of your time now to make sure you’re on track to get the best from the new rules?

What’s changing?

From April, anyone with a flexible pension can:

  • Keep their pension pot invested and dip directly into it when needed from age 55 – this flexible income is known as ‘drawdown’. This means you can choose what, when and how much to take out of your pension – there won’t be any limit on how much you can take out

  • Pass any remaining pension savings onto their loved ones on death, potentially tax free

And the existing options will still be available:

    • You can choose to take tax-free cash (normally up to 25% of your pot)
    • Your pension pot, or part of it, can still be used to buy a guaranteed income (called an annuity)

What this means

The new pension rules give you much more freedom over how you can get access to your pension savings. This makes it all the more attractive to build savings in a pension in the first place.

You have more choice. More control. And more scope for making tax-efficient decisions.

Things to do now

There’s a lot to think about and April isn’t far away. You need to start planning, and taking action, now if you want to get your pension savings in shape to meet your income needs and provide for your loved ones tax efficiently.

1. Review your pensions

Older pensions may not offer the flexibility you want. This means they don’t meet your, or your loved ones’, needs when the time comes to call on them. It makes sense to review all your pensions to make sure they’re right for you and have the level of flexibility you need. Switching to a modern, flexible pension might be better for you. And having all your pension savings in one place can make them easier to manage, and give you a better deal, too. But you need to be careful this doesn’t mean losing out on valuable guarantees or tax benefits.

2. Create a legacy

The new rules put flexible pensions at the heart of any estate planning strategy, giving scope to provide a tax efficient legacy for your loved ones. April’s changes can allow your pot to be cascaded down the generations tax-efficiently within your pension. To benefit, you need to make sure your pension offers flexibility for your beneficiaries. It’s also worth checking to make sure your Beneficiary Nomination is up to date.

The tax benefits of saving into a pension

April’s new rules could also be a prompt for you to save more into your pension. The tax advantages of a pension can run

    • You get tax relief on your pension payments (up to the level of your income), means a £1,000 top-up payment only costs you £800 (or, ultimately, £600 if you pay 40% tax). And your employer can pay more on top, up to your annual allowance
    • While your pension is invested, it’s tax efficient as you don’t pay income tax or capital gains tax on it
    • 25% of what you take out can be tax-free cash
    • If you die before the age of 75, your unspent pension savings are passed on to your loved ones tax free

Contact us

We can guide you through all of these issues, tailoring a financial plan to help you achieve your goals.

Start the conversation now.

The information in this fact sheet is based on our understanding as at 12 March 2015. Your individual tax treatment depends on your circumstances, and tax and legislation can change in the future.