Pension Freedom and Choice


New pension rules that give you far greater flexibility over what you can do with your pension pot, came into force on 6th April 2015.

The changes include the freedom to access your entire pension pot from age 55, changes to death benefits, new flexibility over how to take the tax free cash from your pension and changes to the contributions you can make.

Until now, at retirement people could take an income from their personal pension. However the amount they could take out each year was capped. With effect from April 2015, the cap is removed, allowing people to take as much or as little as they like. You could even take the entire fund.

Under the new rules you will no longer be forced to take an annuity. An annuity is like an insurance policy that people with pension savings can use to insure themselves against living longer than their money. A pension annuity gives an income for the rest of a person’s life in exchange for the funds built in their pension. Regardless of how long you live, the insurance company that has agreed the annuity with you, continues to pay the income they promised when the pension annuity was taken out. By removing the obligation to purchase an annuity, you suddenly have more options available. You can leave your pension invested, while taking as much or as little income as you need whenever you need it.

You are also now able to take the whole pension pot as a lump sum, 25% will be tax free and the rest taxed at your marginal income tax rate. Alternatively, you could take multiple smaller withdrawals over time where the first 25% of each withdrawal is tax free.

A considerable drawback to an annuity is that when you die, the income from the annuity provided by the insurance company often dies with you, leaving nothing for your dependents. From April 2015 you will now be able to pass on your pension to any nominated beneficiaries. If you die before age 75, they will be able to withdraw all funds from the pension tax free. If you die after age 75, your beneficiaries will pay tax at their highest marginal rate.

Although the new pension freedoms allow much greater flexibility as to how you chose to take your benefits, there are new restrictions on how much you can pay into your pension. This is to ensure that people do not abuse the new rules to generate large amounts of tax relief.

The maximum anyone can pay into a pension each year is limited by the ‘annual allowance’; this is £40,000. Once you have taken an income from your pension benefits your annual allowance will be reduced to £10,000. In addition, you cannot utilise any unused allowances from previous years to increase this amount.

There may be taxation implications of drawing pensions in this new environment. We would be more than happy to discuss the new freedoms with you. Why not contact us to see how we can help?

Joe O’Brien, Financial Adviser


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