What should I do with my pension?
With the regular changes to the UK pension system over recent years, it could be easy to miss the significance of the Chancellor’s announcements in the Budget and the Autumn Statement in 2014. However, they promise to revolutionise how we view and use pensions in the UK.
For the first time, pensioners are now able to access their entire pension savings as a single lump sum and pass their pensions to future generations tax-free. This liberalisation gives all private savers much greater choice over how and when they access their pension.
Freedom and choice in pensions
From 6 April 2015, the new income rules will mean that:
- Pensioners are able to access their savings from age 55
- 25% of the pension can be withdrawn with no Income Tax payable (also known as ‘tax-free cash’)
- 75% of the pension can be withdrawn and is subject to Income Tax (this amount can also be used to purchase an annuity)
There will be a number of options for drawing your pension, including:
- Take the tax-free cash as a lump sum, then take the taxable income on a regular basis (either through drawdown or the purchase of an annuity)
- Take the tax-free cash in smaller amounts on an annual basis, along with the taxable income
- Take both the tax-free cash and taxable income in a single tranche
Of central importance to your retirement planning is to ensure that your income withdrawals are sustainable for the rest of your life. If you withdraw too much money early in your retirement, you may not have enough left over to enjoy your later years. The best approach will depend entirely upon your circumstances, and we recommend that you seek professional advice before making any final decisions.
Pensions as a legacy
The other major change announced by the Chancellor concerns the treatment of pensions upon the death of the pensioner. From 6 April 2015:
- Any pensioner dying before the age of 75 can pass their pension on to a nominated beneficiary, either as a tax-free lump sum or a tax-free income for life.
- Any pensioner dying after their 75th birthday can pass their pension on to a nominated beneficiary, to provide either a taxable lump sum or a taxable income for life.*
This means that pensions will have the same treatment on death regardless of whether they have been drawn upon or not. This is unlike the old rules, which distinguished between pre- and post-retirement. As such, pensioners should now feel more comfortable drawing on their pension savings, as they won’t negatively impact their legacy to loved ones.
If you would like to know more about the changes to pension rules coming into effect from 6 April, one of our nationwide financial planners would be happy to help. For more information please call 020 7189 2400 or email us today.
*The lump sum/income will be taxed at the beneficiary’s usual rate. Transitional arrangements exist for the 2015/16 tax year. This article is based on our current interpretation of the Taxation of Pensions Bill published on 14 October 2014.
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. This article does not constitute personal advice.