The most important changes can be summed up by the phrase "New Pension Freedoms".
Instead of limiting the amount of income you can take from your pension savings, the new rules allow you to decide for yourself when and how much of your pension savings to take.
The options available
Under the new flexible rules you can mix and match any of the options below, using different parts of one pension pot or using separate or combined pots.Follow the links to read the full details on each option, including the benefits, potential risks and tax implications. Not all pension schemes and providers will offer every option – even if yours does be sure to shop around.
Leave your pension pot untouched
You may be able to delay taking your pension until a later date. Your pot then continues to grow tax-free, potentially providing more income once you access it.
Flexi-access drawdown - use your pot to provide a flexible retirement income
Flexi-access is the only drawdown option available for people who take their pension benefits for the first time after 6th April 2015. With this option you take up to 25% (a quarter) of your pension pot or of the amount you allocate for drawdown as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, though this may be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity your income isn’t guaranteed for life – so you need to manage your investments carefully.
Use your pot to buy a guaranteed income for life – an annuity
You can choose to take up to 25% (quarter) of your pot as a one-off tax-free lump sum then convert the rest into a taxable income for life called an annuity. There are different lifetime annuity options and features to choose from that affect how much income you would get. You can also choose to provide an income for life for a dependant or other beneficiary after you die.
Take small cash sums from your pension pot
You can use your existing pension pot to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free. For each cash withdrawal the first 25% (quarter) is tax-free and the rest counts as taxable income. There may be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.
With this option your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income and it won’t provide for a dependant after you die. There are also more tax implications to consider than with the previous two options.
Take your whole pot as cash
You could close your pension pot and take the whole amount as cash in one go if you wish. The first 25% (quarter) will be tax-free and the rest will be taxed at your highest tax rate – by adding it to the rest of your income.
There are many risks associated with cashing in your whole pot. For example, it's highly likely that you'll be landed with a large tax bill, it won't pay you or any dependant a regular income and, without very careful planning, you could run out of money and have nothing to live on in retirement.
Under Trivial Commutation rules, legislation also exists which allows you to cash in certain defined benefit pension pots. Under Small Pot legislation if you are aged 55 or over you are allowed to cash in up to 3 pension pots each to the value of £10,000. 25% per cent of each pot will be tax-free and the balance taxed at your marginal rate dependent on other income.
If you only have £30,000 in total in your pension pots you can also cash this in and receive 25 per cent tax free.
Cashing in your pension pot will not give you a secure retirement income. We strongly recommend that you get financial advice before you commit.
Mixing your options
You don't have to choose one option when deciding how to access your pension – you can mix and match as you like, and take cash and income at different times to suit your needs. You can also keep saving into a pension if you wish, and get tax relief up to age 75.
Which option or combination is right for you will depend upon your circumstances.
These rules can be complicated, and we urge you to speak to your financial advisor if you have withdrawn some of your pension funds, but are thinking of putting more money back into them in the future
To learn more about how pension drawdown works and the options available you can read more here. If you would prefer to speak to one of our friendly advisors, please send us an email or call us FREE on 0800 03 04 008.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.