6 April 2015 marked the biggest change to pensions and retirement planning in living memory. The headlines surrounding the changes focus on the forthcoming flexibility regarding access to pension pots, with some commentators raising concerns about the over 55’s squandering their hard-earned savings overnight, leaving them without financial security later in life.
But what is the truth behind the headlines and what do the changes really mean for you?
The main change is accessibility. If you are aged over 55 and take, or are due to start taking drawings from your pension you will now have much more freedom over how you access funds. In essence, you can choose to draw savings from a defined contribution pension in one go, in smaller lumps sums and/or a regular income as you wish, subject to tax considerations.
Whilst on the surface, the changes are a positive move and allow people many more options on what to do with their money, there are a number of aspects that require consideration. For example, whilst the first 25% of a pension pot will still remain tax free, any further drawdowns will remain taxable at a taxpayer’s marginal rate. The changes are also potentially worrisome for people that are reliant on the income from their pension for everyday living costs. It is important in these circumstances that a long-term view is taken, and taking a sustainable level for the remainder of the individual’s lifetime remains a priority.
Changes to death benefits
The other main change afforded by The Pensions Scheme Act is the way in which pension pots can be passed on upon death. If the pension holder is under 75 at the time of death, it can be passed on to a named beneficiary or beneficiaries tax free. This is a significant change to the previous rules, under which a rate of 55% tax was payable if a pension was encashed in full after drawing benefits from the pension.
Even where the pension holder is over 75, the amount drawn will be added to the income of the beneficiary and taxed accordingly at the relevant rate. So for higher rate tax payers in particular, the new legislation is much more beneficial than previous rules dictated for families.
There will also be greater choice over who is eligible to be a beneficiary; the pension holder can nominate as many people as they wish and who they wish and in whatever proportions they desire.
Although billed as providing ‘freedom’ for pensions, this shouldn’t be confused with ‘simplicity’. In fact, the changes may actually result in the decisions regarding retirement planning becoming more complex, especially if you have other investments or forms of income.
Despite the radical overhaul in pensions, the underlying advice for planning for your future remains the same. The important thing to remember is that just because the changes came into effect from 6th April, you do not need to take action straight away. If you do plan to make changes to the way you draw down from your pension, it is worth seeking independent financial advice so you can ensure you are doing so in the most tax-efficient and beneficial way.
For a free, informal chat about any aspect of retirement planning or your personal finances please feel free to contact us.
NB. The Financial Conduct Authority does not regulate tax advice.