Pension Freedoms 2015: All You Should Know
The Pension Freedoms were announced by George Osborne back in 2015 and came into effect at the beginning of the tax year 2015/2016. The radical reforms represent a major shift in how you can access your private pensions. The Government introduced pension freedoms with the aim of giving people more over their pension savings.
What Did Pensions Look Like Before the April 2015 Reforms?
Before the pension reforms in 2015, there were strict rules on how you can access your pension fund. You could use a “Capped Drawdown” to take your income and there were limits on how much you could withdraw. The other option was to buy an annuity from an insurance company in exchange for a guaranteed income throughout your lifetime.
Small pension pots could still be cashed in and 25 % of the amount you take was still tax free and the balance would be added to your income and taxed at the higher rate you paid. To be eligible for small pension pots, you had to be 60 or older and be able to add all your pensions up to have a total less than £18,000 (increased to £30,000 in 2014).
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What Were the Pensions Freedoms Introduced in April 2015?
- Better Access to Your Savings
From 6 April 2015, you can access as much of your as you wish from Defined Contribution Pension Schemes, also referred to as Money Purchase Schemes. You only have to be 55 years and above. Here are the major ways you can access your pension:
- Lump Sum Withdrawal
You can take your entire pension savings in one go if you wish and use it as you like. If you do, 25% of this sum will be tax free and the remaining 75% will be added to your other income and is taxable based on your current income tax bracket. It is recommended that you consult an Independent Financial Advisor before taking this course of action. It is important that you are fully aware of the long-term implications it will have your retirement and subsequent living standards as well as the high tax bill you’ll incur.
- Buy an Annuity
You can use all or some of your pension pot to buy an annuity. Annuities give you a regular and guaranteed income throughout your retirement.
- Get an Income Drawdown
A Pension Income Drawdown allows you to take money from your pension fund while your funds still remain invested and continue to benefit from any investment growth. Under the new pension rules, there are no limits on the amount of money you can take from your drawdown fund each year. Just keep in mind that only 25% of your fund’s value will be tax free.
Other pension options include, leaving your pension savings where they are or mix all the available options.
- Flexibility on Income Drawdown
The 2015 pension reforms made income drawdown a more realistic option for anyone with retirement savings. All income drawdown arrangements set up after April 6th 2015, are known as Flexi-Access Drawdown (FAD). A Flexi-Access Drawdown does not have minimum requirement or a cap on the amount you can withdraw. It gives you more flexibility by allowing you to withdraw as much as you want every year (subject to taxation).
Note that if your plan was set up before April 6th, 2015, you will remain in the Capped Drawdown. If you want to convert to Flexi-Access Drawdown, you need to notify your or a financial advisor.
- Avoid the 55% Death Tax
Before the April 2015 pension reforms, if a pension fund holder dies, their beneficiaries were subject to a 55% death tax. The only way death tax could be avoided is if the pension holder died before the age of 75 and had not taken any income or cash from your pension.
You will be glad to hear that this was scrapped under the new pension rules. If the pension holder dies before age 75, a beneficiary can inherit some or all the fund as an income from drawdown or a lump sum, tax-free to the Lifetime Allowance, currently . If the pension fund holder dies at or after the age of 75, the pension pot that is inherited will be taxed at the recipient’s marginal rate.
- Pension Transfers
Pensioners now have a right to transfer between different Defined Contribution schemes. However, transfers from defined benefit schemes will be allowed, but the person must take advice from a regulated independent financial adviser. It is a legal requirement you take advice from a regulated pension advisor if your pot’s transfer value is £30,000 or more.
What Should I Do If I Want to Use the New Pension Freedoms?
If you are considering withdrawing a large amount of your pension through the 2015 pension freedom, you should first seek out independent financial advice. Our advisers at Hilltop Finance will explain to you the pros and cons of using the pension freedoms and may even be able to suggest alternatives that will help you achieve whatever result you are trying to accomplish. If you and your adviser decide it is best to access your pension pots using the pension freedom, then they will liaise with your pension provider on your behalf and secure a workable plan to allow you to access your savings.
These are just some of the most important details you should know about pension freedoms. For more information about pension freedoms, contact us at Hilltop Finance.