A guide to Pension Freedoms

Having trouble understanding what the new pension rules mean for you? We’ve highlighted the key changes below. These new rules came into effect on 6 April 2015.

Earlier access and more choices

You can now access your entire pension pot from the age of 55. This will rise to 57 in 2028 and continue to rise in line with State Pension Age, remaining ten years below this.

New freedoms mean you’ll now be able to access your money in the following ways:

  • Withdraw your entire pension pot – 25% tax free and you’ll pay your marginal rate of income tax on the remaining 75%
  • Make as many small withdrawals as you wish – with 25% of each withdrawal tax free and the remainder at your marginal rate of income tax
  • Withdraw a tax free lump sum of 25% - with the remainder as a regular taxable income at your marginal rate

Based on a pension pot of £120,000 your choices would look like this:

  • Withdraw your entire pension pot - receive £30,000 as tax free cash and pay your marginal rate of income tax on the remaining £90,000
  • Withdraw small amounts as you wish – for a withdrawal of £1,000 you’d receive £250 tax free and the remaining £750 would be taxed at your marginal rate of income tax
  • Withdraw your tax free lump sum of £30,000 and use the remainder as income. However you receive this income (an annuity or drawdown), this money will be taxed at your marginal rate of income tax

Income Drawdown carries significant investment risk as your future retirement income remains totally dependent on your pension fund performance. You should remember that if you access your tax free cash early, the benefits will be less than if you wait until your planned retirement age. Therefore pension release may only suit a limited number of people.

The value of your investments and any income from them can fall as well as rise and you may not get back the amount you originally invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

New contribution restrictions

Private pension contributions are currently capped at an annual allowance of 100% of your gross salary, up to a maximum of £40,000. The lifetime pension allowance is due to be capped at £1 million from 6 April, down from £1.25 million, and rise with inflation. Any contributions above this are subject to income tax. While the annual allowance will remain unchanged, your contributions could be capped to £10,000 if you also make tax free withdrawals from these pensions after 6 April. Any access to pensions that continue to be contributed to must be reported to your pension provider within 91 days.

The above does not apply to final salary scheme pensions or defined benefit schemes.

Transfers

In order to take advantage of the new freedoms and unlimited withdrawals, you may be able to transfer a final salary pension to a defined contribution pension. In order to ensure you do not lose out on any potentially valuable benefits of your final salary pension, you are required to seek appropriate financial advice before doing this.

What happens upon your death?

There are changes to what happens to your pension and how it is taxed upon your death, depending on your age and what you have chosen to do with your funds.

  • If you haven’t bought an annuity

Current pension rules state that you can pass on your pension as a tax free lump sum if you die before the age of 75 and haven’t taken any tax free cash yourself. Otherwise any sum passed on is subject to 55% tax.

From April, if you die before the age of 75 your beneficiaries can take the entire pension as a tax free lump sum, or choose a tax free income from an annuity or income drawdown.

If you die after reaching 75, your beneficiaries can choose to take the entire pot as a lump sum subject to tax at 45%, take a regular income by annuity or drawdown at their rate of income tax, or take several lump sums which will individually be taxed at their own rate of income tax.

  • If you have bought an annuity

You can currently buy an annuity with a guaranteed period and upon your death, payments can continue to be made to your spouse or partner, subject to income tax for the remainder of the guaranteed period.

From April 2015, your annuity can be passed on to anyone and if you die before the age of 75, it will be paid tax free. Your beneficiary will also be able to pass this on should they die before the end of the guaranteed period.

Your State Pension

It isn’t just your personal and workplace pensions that are subject to change, although reforms to the State Pension are to be introduced gradually. From April this year, weekly pension payments are to get a pay rise of 2.5% but more permanent changes to entitlement come into effect from April 2016.

The main change will be to simplify the way the State Pension is calculated. The current system is made up of basic state pension and additional state pension and calculations are based on a minimum of thirty years national insurance contributions, your age, your marital status and your employment history.

The new calculation system will have one tier and you will be entitled to claim a proportion of State Pension provided you have at least 10 years of National Insurance contributions (or receive National Insurance credits). To claim the full amount, at least 35 years of contributions or credits will be required.

The age you are able to claim the new state pension will also be reviewed regularly.

More detailed information on personal, workplace and the new state pension is available HERE.

We recommend you seek financial advice before making any decisions regarding your savings, investments or pensions.

To find out more about your own pension pot and what your options are from April, speak to a Financial Adviser from Newcastle Financial Advisers today, in your local Newcastle Building Society branch or in the comfort of your own home.

Make an appointment online, pop into your local branch or call us on 0345 600 4330

Newcastle Building Society introduces to Newcastle Financial Advisers Limited for investments, pensions, inheritance tax planning, financial advice and life cover. Newcastle Financial Advisers Limited is an appointed representative of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.


SOURCES:
www.pensionwise.gov.uk/ (2015)
www.gov.uk/browse/working (2015)