From April 2015, it’s been announced that savers will have more freedom to as much (or as little), as they want their pension. We’ve summarised all the changes in this article for you to help you get the need-to-know.
Currently, savers are able to take 25% of their pension in a tax-free lump sum, but have then been subsequently pressured into buying an annuity with the rest of their money. However, from April 2015, savers over the age of 55 will be given the option of taking a number of smaller lump sums, instead of one single big lump sum, and in each case, 25% of the sum will be tax-free. However, as pension advisers are saying, this change was widely anticipated as an essential part of the new pension freedoms, and was actually already in place in the form of “phased retirement” or “vesting” under the old system.
Currently the rules say you will have to be 55 to access your pension. If you try to take the money before that age, the old tax rules apply – which mean that a minimum 55% is taken by HMRC. Younger workers, though, should watch out for a rise in the 55-year-old threshold for accessing their money. Furthermore you don’t have to be retired to be entitled to this new scheme. You can be 55 years old and in work, receiving a salary, and be allowed access to your pension.
Those who have build up large pension pots are going to be the main beneficiaries of the new scheme, as they will be able to use the freedom to avoid paying 40% tax.
For example, if you have a £200,000 pot, you could cash it in from April 2015 and have £50,000 tax-free, but the remaining £150,000 would be liable for tax. This means that, depending on the individual’s personal allowance and other earnings, a lot of it will be swallowed up by 40% tax – as much as £53,600.
But if the person decides to take the pension instead as £50,000 each year for four years, then each year he or she will receive £12,500 tax-free and be liable for income tax only on the remaining £37,500, which could be as low as £5,500. So instead of paying more than £50,000 in tax, the person pays around £22,000.
The new scheme effectively means you can use your pension as a bank account, as the money you have saved will sit in a pension pot for you to access whenever you want from age 55, subject to your marginal tax rate.
One legal method of taking advantage of the reform is to withdraw the money slowly so that you minimise the tax paid, and then park the money you have taken out into a tax-free Isa. Everyone has a £15,000 Isa tax-free allowance, so a husband and wife could shelter £30,000 of the money taken out of a pension into an Isa, ensuring that when they want to draw it down later there won’t be income tax to pay.
However, it is recommend you seek financial advice on this matter.