Pension Freedom - What This All Means?

New pension rules which will give you far greater flexibility over what you can do with your personal pension fund came into force with effect 6th April 2015.

These changes include; freedom to access the whole of your pension fund, choice over how to receive the tax free cash from your pension fund, changes to the death benefits and changes to how how much you will be able to contribute to your pension in the future.  Additionally, the government is now making free guidance available on the options you have when you retire.  However, this should not be confused with actual advice as they won’t offer you actual advice, only guidance and they will probably recommend you see a suitably qualified financial adviser.

So, whether you hold a SIPP, an individual or group personal pension or simply a stakeholder pension, these new rules on how you can use your pension will have a major impact going forward.

Flexible withdrawals

If you are using your pension to provide a regular income, payments can be on a monthly, quarterly, half-yearly or annual basis, or you can take ad hoc income payments as you need them.

The big change is that there will be no limit on the amount of income you can take, it is possible to take your entire fund in one go, although you should seriously consider the impact of this as this could result in you paying a large amount of tax.  If you are reliant on the income from your pension to support you, you should consider taking a level of income that is sustainable for the whole of your lifetime.

Taking income from your SIPP can be complex. You need to consider the investment returns that you may be able to achieve and the level of income that you wish to take. If you are unsure about your options you should consult a suitably qualified financial adviser.

Tax treatment

You can normally take 25% of your fund as a tax-free lump sum. Any withdrawals after the tax- free cash whether taken as a lump sum or as regular income are taxed at your normal marginal rate. You can choose to either take all of your tax-free cash in one go, or you can take only a portion of the tax-free cash you’re entitled to at any time.

You need to be aware that if you take too much income this may put you into the next tax bracket, meaning you pay a higher rate of tax.

Restrictions

Anyone over the age of 55 can use their funds to take benefits.

If you have pension funds in excess of the “lifetime allowance”, currently £1 million, you can still take flexible withdrawals but you will pay significant tax charges on any funds over the lifetime allowance.

If you already have a pension in capped drawdown then you can use the new rules to access more income but you will not be able to take any further tax free lump sums.  Some companies will let you move from a capped drawdown arrangement into a flexible drawdown plan.


If you have certain types of protection, or an enhancement to your lifetime allowance, some of the new options may not be available to you.

You can find out more about your options at retirement using the Government’s free, impartial Pension Wise service. More information about the service and how you can use it can be found on the pension wise website.

Changes to tax free cash.

Currently most people can take 25% of their pension fund tax free as an up-front lump sum.

From 6th April 2015 you can choose to either take the tax free cash all in one go or have a portion of any income paid tax free.

For example if you have a pension fund worth £200,000 that you have not taken any benefits from, you can choose to:


It is possible to mix-and-match how you take your benefits.  So, for example, you could take half of your fund as a lump sum (25% tax free, 75% taxed), and the other half you could take the tax-free elements as a lump sum and leave the rest in your pension to provide you with an income in the future.

Taking income from your SIPP instead of buying an annuity can be complex. You need to consider the investment returns that you may be able to achieve and the level of income that you wish to take. If you are unsure about your options you should consult a suitably qualified financial adviser.


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