Retiring in the UK used to be a simple affair. For most people, it meant withdrawing a bit of tax-free cash from their pension pots to reward themselves and then using whatever was left to buy a lifetime annuity – a guaranteed income that would last as long as they did.
From 6 April this year, however, anyone with a defined contribution pension will have complete freedom over how they use the money they’ve built up inside their money purchase pension savings. You’ll no longer have to buy an annuity when you start taking pension benefits; you’ll be able to withdraw as much or as little as you like from your pension, while leaving the remainder invested; and you may be able to pass on more of your wealth to future generations, thanks to changes in the way pensions are taxed.
And these are just some of the changes about to come into force. With many other rules being tweaked at the same time, retirees will have much more flexibility but also much more to consider, in order to make the most of their pension savings. Here are the highlights:
Complete freedom over how you use your pension
If you’re over 55, and you have a defined contribution pension then, from 6 April 2015, you’ll automatically be eligible for ‘flexi-access drawdown’, which enables you to withdraw as much as you like from your pension pot, whenever you like, while leaving the remainder invested. With the agreement of HM Revenue & Customs, in certain circumstances you may be able to do this from a younger age.
Until 5 April 2015, you’re only eligible for flexible drawdown if you can prove you have a minimum income of £12,000 a year guaranteed for the rest of your life – for example, by combining your state pension with a lifetime annuity. Under the new rules, that requirement will no longer exist, and you’ll be free to transfer your pension pot into a drawdown product. You can read more about how the drawdown rules are changing here.
The traditional options will still be available. You could, for example, withdraw up to 25% of your pension pot as a tax-free lump sum and then use the rest to buy a lifetime annuity. Indeed, this will continue to be the preferred option for many people. But in principle you’ll be able to use your pension like a bank account. And you could even take 100% of it as a lump sum, if you so desired.
You’ll also be able to mix and match the different sources of retirement income. For example, you could use flexi-access to buy multiple annuities over time, keeping your money invested (and free for other purposes) until annuity rates improve, or until you really need the security of a guaranteed income stream.
In principle, the new rules should allow you to build a retirement strategy that is bespoke to your needs, and financial advisers expect them to enable advanced tax-planning strategies, especially where inheritance is concerned.
Tax changes that make it easier to pass on wealth
Under the current rules, it’s difficult to pass unused money in your pension onto the next generation without incurring a lot of tax. If you’ve started taking any benefits from your pension, or you’re over 75 when you die, then passing on your pot as a lump sum will incur a 55% tax charge.
From 6 April, however, this so-called ‘death tax’ will become a thing of the past. You can read more about this in our article entitled “New pension rules make it easier to pass on pension wealth”.
Simultaneously, it’ll become easier to pass on wealth via annuities. If you leave an annuity to your spouse, partner or beneficiaries then, under the current rules, they’ll have to pay income tax on the income it generates at their marginal rate. From April, they’ll get the same benefits tax-free if you die before the age of 75. You can read more about how the rules related to annuities are changing.
Access to impartial advice
In his March 2014 Budget speech, George Osborne made what he called a ‘Guidance Guarantee’ – an assurance to those approaching retirement that they would be given help to make sense of the new pension rules and choose between the many new options available. The government has since announced that it will launch a new guidance service called Pension Wise over the next few months.
The Pension Wise service will be available free of charge to anyone who is aged 55 or over, and who has a defined contribution pension. It will provide impartial information and guidance over the phone, via The Pensions Advisory Service, and face-to-face consultations via the Citizens Advice Bureau.
The service won’t offer advice of the sort that you’d get from a qualified financial adviser. They will be able to offer you a set of recommendations for what you should do, based on an holistic review of all your needs, goals and circumstances. And whatever option you decide to take, they can make sure you won’t pay any more tax than necessary along the way. You will be able to discuss with them the cost of the advice and services they will provide to you, not only initially, but as part of an ongoing review of your financial plans as your future requirements change.
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