What are Pension Freedoms and can they benefit me?
What are they?
Introduced in 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’ / “Final Salary” 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
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.
Can I take it ALL?
You really can take it all, but this will almost certainly have (potentially expensive!) tax implications. Plus, you need to think about what you’re going to live on in retirement.
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 an online 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
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: ο Any income you pass on to your dependant or other nominated beneficiary will be taxable at their highest tax rate;
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.
What about taking an income?
You can opt for certainty and buy an annuity. Or you can move your pot into a product called a drawdown pension. This 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. Don’t forget investment values can fall as well as rise.
So are “Pension Freedoms” right for me?
The short answer is, “Maybe. . . but it depends”
Everyone’s circumstances are different and while the ability to take the whole pension pot in one go looks attractive, there is a lot to consider and it might not be right for you.
It's essential that you seek professional, independent advice before you make a decision that will impact on the rest of your life.
Mike.firstname.lastname@example.org | 07455 262282