What’s happening to pensions?
From 6 April 2015 you have unrestricted access to your retirement savings, no matter how large or small your pension pot is you are no longer obligated to buy an annuity. As long as you are at least 55 you can take out as much of your pension money as you see fit and you are no longer forced to leave your pension arrangement after you reach 75. All these options have significant tax implications that you should consider.
What type of pension do I need?
These new rules only apply to defined contribution (DC) schemes, also known as money purchase pensions, which are based on contributions that you and your employer make. They do NOT apply to defined benefit (DB) schemes or final salary pensions, which are based on your earnings and how long you’ve been a member. You should bear in mind that your existing personal pension provider is not obligated to offer this flexibility.
Should I ditch my final salary pension?
The new flexibility and tax advantages of DC pensions are tempting but you will be losing valuable benefits if you transfer out of a final salary pension, which makes transferring out unlikely to be a suitable option for you. Final salary pensions provide a guaranteed income after retirement and often come with additional perks such as inflation-proofing and pensions for spouses.
The government has said that anyone with final salary pension benefits of £30,000 or more must take professional financial advice first.
What about tax?
When you retire any cash you take above your 25 per cent tax-free lump sum is taxed as income, which could be nothing at all if you’re within your personal allowance (which is £11,000 for the 2016/2017 tax year), 20 per cent (basic rate), 40 per cent (higher rate), or 45 per cent (additional rate). Remember that any pension withdrawals are included as income so this alone could bring you into a higher tax bracket. Timing of taking benefits is also critical as it is important that emergency coding is not applied to these withdrawals.
Can I leave my pension invested?
Absolutely. You can leave the money invested in a drawdown product and access it over time as you see fit. Previously, you needed a certain level of guaranteed income from other sources if you wanted to take unlimited income from a pension in drawdown, but these rules were swept away in April 2015.
Can I still buy an annuity?
Yes. These insurance policies are still the only retirement products that offer a guaranteed income for life and for many people are still the best option. You don’t have to use your entire pension pot to purchase one.
Should I consolidate my pensions?
If you’ve accumulated several pension pots over the years you may want to bring them together under one roof, particularly if any old schemes carry higher charges.
You can transfer them to your current company scheme or into a private pension scheme. We will need to check that you won’t lose any valuable benefits first (such as guarantees or protection for your dependents) and watch out for excessive exit penalties.
Is my pension taxable when I die?
Yes, from April 2015 if you are over 55 and die before reaching age 75 your pension pot is exempt from Inheritance Tax. If you die over the age of 75 your pension can pass on to nominated beneficiaries who will only pay tax at their own income tax level. There is no restriction on who you can nominate as a beneficiary.
What about the state pension?
The amount of state pension you get will change if you qualify for it on or after 6 April 2016. The basic and additional state pensions are going to be replaced by a flat-rate, single-tier state pension with a full level of £155.65 in April 2016.