2015 pension freedoms
The 2015 pension freedoms allow people aged 55+ to access their ‘Defined Contribution’ or ‘Money Purchase’ pension fund as they wish. Money purchase pensions include most personal pensions and stakeholder pensions, including those arranged through your employer, where the pension you receive is related to the contributions you make. They do not include ‘Defined Benefit’ pensions, where the pension you receive is determined by your salary and length of service.
The biggest change is to allow people aged 55+ to withdraw the whole of their pension fund as one lump sum.
The 2015 rules will not only bring freedoms and choice to use your pension fund as you wish, but also the need for careful planning to ensure that you have sufficient income for the whole of your retirement.
Free guidance for everyone +
As part of the 2015 pension freedoms, the Government recognises that retirees will have greater choice and greater responsibility to make the right decision on how to take the benefits from their pension fund.
To help you understand your options and make the right choices, the Government has introduced a free and impartial guidance service called Pension Wise.
The service will:
• Discuss your retirement options and provide key facts and information on each of these outcomes (e.g. tax)
• Outline the potential issues you will need to consider including life expectancy, income and possible long-term care needs
• Provide you with a record of the session and outline your next steps. This should include key facts, potential issues you need to consider, any information or advice you will need and further details on how to shop around.
This guidance can be accessed online, over the phone or face-to-face. Further details can be found on the Pension Wise website.
Before you use the service:
Gather information about your pension and other sources of income.
Check whether any of your pension policies have Guaranteed Annuity Rates, other guarantees, or any restrictions or charges such as Market Value Reductions (these should normally be set out in your retirement documents).
If you had a pension but no longer have the details you can try and find your pension through the Government’s Pension Tracing Service. They can be contacted online at gov.uk/find-lost-pension or by telephone on 0345 6002 537.
The Guidance Service will not provide advice or recommend specific products or providers. If you feel you need advice we would recommend that you talk to a financial adviser. If you don’t currently have a financial adviser, you can find one online at thepfs.org or www.unbiased.co.uk. Advisers may charge for providing advice and should confirm any cost to you beforehand.
You can still enjoy 25% tax-free cash +
There has been no change to the amount of tax-free cash you can take, and you’re free to spend this any way you like!
Withdraw as cash +
Whilst you can now take your pension savings as cash in one go or as a series of lump sums, the first 25% will be tax-free but the remaining 75% will be subject to income tax. And, if you take your pension in the same tax year as you’ve received a salary then you could find yourself propelled into the next tax bracket with even more tax to pay.
If you’re considering taking your pension pot as cash use a tax calculator to see how much the taxman will get.
If you’re considering using your pension savings to redeem all or part of an existing mortgage or to clear some debts, then it is worth seeking financial advice to find the best solution for your circumstances.
Lower taxation on death benefits +
If you die before age 75, any death benefits from your pension that you pass on to your dependant or other nominated beneficiary will be tax-free.
If you die age 75 or over:
- Any income you pass on to your dependant or other nominated beneficiary will be taxable at their highest tax rate;
- Any lump sum you pass on to your dependant - or other nominated beneficiary - will be taxable at the beneficiary’s marginal tax rate.
Income drawdown limits removed +
You can move your pot into a product called a drawdown pension. A drawdown pension allows you to draw income from your pension fund whilst it remains invested. There will be no limits on the amount you can take as income from your invested funds. Drawdown income is subject to income tax.