This year, we have seen further changes made to the unprecedented announcement at 2014’s Budget in which the coalition government announced radical new legislation that saw the largest pension reformation for the first time in nearly 100 years. This landmark move was said to provide greater freedom for both pension savers and employers, as well as “[enabling] a new generation of better, fairer schemes” (gov.uk).
So – what do these changes entail? This exciting new move means that not only is making pension contributions more invaluable than ever – for the first time in April 2015, the government has granted those over 55 the freedom to use their defined contribution any way they like. This means that it is now possible to freely withdraw any amount of income instead of investing in retiring and buying an annuity to provide secure income for retirement from their pension fund. It also allows pension holders to pass their pensions to anybody, and beneficiaries can inherit them at a lower tax rate – an effective inheritance tax planning tool.
Effectively, the tax rules have been simplified to offer pension savers more freedom in accessing their pensions. The possibilities for withdrawing income include flexi-access drawdown, in which as much of the pension can be withdrawn as is desired, with up to 25% tax free if not previously used for drawdown; uncrystallised funds pension lump sum (UFPLs), whereby a one-off or several lump sum payments may be taken (25% tax free); and a traditional annuity, paying a guaranteed income for life from a pension fund.
It was also announced that the lifetime allowance of pension funds is to be decreased from £1.25 million to £1 million from April 2016, the third consecutive reduction to address the quantity of tax relief going to higher earners. This brings questions of whether or not to pause contributions in order to achieve a more protected lifetime allowance, aimed particularly at individuals who already have substantial retirement savings – therefore, considerably more financial planning is required.
Although the legislation change appears primarily positive, the new pension choices are complicated. It is essential that the following points are considered: where to invest your money, the quantity of sustainable income required, whether or not to buy an annuity, whether or not to invest in a drawdown product, and the tax implications of withdrawal.
It has never been more important to speak to a financial adviser before making decisions about your retirement, and The Money Map can help by simplifying technical language, offering professional advice on pensions, and steering you to ensure you make the right financial choices. We specialise in providing thorough, cost-effective advice on retirement options including annuities, drawdowns, triviality, and small pension pots, and speak in plain English to ensure you gain the good financial understanding that you deserve.
For more information on your retirement options, book your free consultation with one of our experienced advisers by calling 0800 848 8250, email firstname.lastname@example.org, or fill out our simple contact form.