Pension Freedoms

What This All Means?

Pension rules changed from 6th April 2015 giving far greater flexibility over what you can do with your personal pension fund. These were updated recently from 6th April 2023.

The initial changes included the freedom to access the whole of your pension fund, choice over how to receive the tax-free cash from your pension fund, changes to the death benefits and changes to how much you will be able to contribute to your pension in the future. Additionally, the government made free guidance available on the options you have when you retire. However, this should not be confused with actual advice as they won’t offer you actual advice, only guidance and they will probably recommend you see a suitably qualified financial adviser.

So, whether you hold a SIPP, an individual or group personal pension or simply a stakeholder pension, these new rules on how you can use your pension will have a major impact going forward.

You can take the whole fund in cash at one go.
You can take out smaller lump sums until there is nothing left
Or you can take part of the fund as cash (usually 25% tax-free) and use what is left to provide a regular income.

Flexible withdrawals

If you are using your pension to provide a regular income, payments can be on a monthly, quarterly, half-yearly or annual basis, or you can take ad hoc income payments as you need them.

The big change is that there will be no limit on the amount of income you can take, it is possible to take your entire fund in one go, although you should seriously consider the impact of this as this could result in you paying a large amount of tax. If you are reliant on the income from your pension to support you, you should consider taking a level of income that is sustainable for the whole of your lifetime.

Taking income from your pension can be complex. You need to consider the investment returns that you may be able to achieve and the level of income that you wish to take. If you are unsure about your options, you should consult a suitably qualified financial adviser.

Tax treatment

You can normally take 25% of your fund as a tax-free lump sum (this is limited to £268,275 unless higher protections apply). Any withdrawals after the tax- free cash whether taken as a lump sum or as regular income are taxed at your normal marginal rate. You can choose to either take all of your tax-free cash in one go, or you can take only a portion of the tax-free cash you’re entitled to at any time.

You need to be aware that if you take too much income this may put you into the next tax bracket, meaning you pay a higher rate of tax.

Restrictions

You must be over the age of 55 to use funds and take benefits. (Note: this will increase to age 57 from 6th April 2028).

If you already have a pension in capped drawdown then you can use the new rules to access more income but you will not be able to take any further tax-free lump sums. Some companies will let you move from a capped drawdown arrangement into a flexible drawdown plan.

If you have certain types of protection on your pension, some of the options may not be available to you.

You can find out more about your options at retirement using the Government’s free, impartial Pension Wise service. More information about the service and how you can use it can be found on the MoneyHelper website.

Taking income from your pension instead of buying an annuity can be complex. You need to consider the investment returns that you may be able to achieve and the level of income that you wish to take. If you are unsure about your options, you should consult a suitably qualified financial adviser.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.

Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.

Contact us to discuss your requirements, or if you prefer let us call you!