Pension freedom changes explained

Pensions Changes Update from April 2015

From April 2015 the government is introducing major changes to the way in which you can take your pension benefits.  These changes affect defined contribution (Money Purchase) pension arrangements like the Top up Pension and Stakeholder Pension.

Below is a summary of the main changes:

Flexible access to pension
From age 55, whatever the size of your defined contribution pension pot, you'll be able to take it how you want, subject to your highest marginal rate of income tax in that year.  This means you can either:

1. Buy an annuity, providing a regular taxable income with the option to take up to 25% as a tax free lump sum*

2. Transfer your funds to a flexible access drawdown product and either:

 take up to 25% tax free immediately with a regular taxable income from the remaining fund or 

take 25% tax free from each regular drawdown payment with the balance taxable at your marginal rate   

Either way this means you draw income directly from your pension fund whilst it is still invested*

3. Take flexible lump sums as and when you like with the first 25% of each lump sum tax free with remainder taxed at your highest marginal rate *

4. Take 25% of your fund as a lump sum and then the remainder of the fund in one payment taxed at your highest marginal rate. You may find we deduct more tax than you are required to pay.  This is due to the way HMRC collect the tax. You will be able to reclaim any excess directly from the HMRC

* You will need to move your fund to another provider if you wish to take these options. Police Mutual will pay up to 25% of your fund as an initial lump sum to you if required, but we don't currently offer a product to enable you to access your remaining pension in these ways.

Access to impartial advice
A new pension's guidance service has been unveiled by the Government.  The new Pension Wise service will be free and impartial to help you understand what your choices are and how they work. You'll be able to get help on their website, over the phone or face to face regarding what options you have with your pension pot, the different pension types and how they work and what's tax-free and what's not.

Restrictions on how much you can contribute to your pension
Under the new rules you will be able to draw on your pension (after age 55) whilst continuing to make payments (and claim tax relief).  In this circumstance your pension contributions annual allowance will be limited to £10,000 per tax year rather than the £40,000 annual allowance (2015/2016 tax year) that is the present contribution limit prior to drawing any retirement benefits.

55% tax on death over age 75 abolished
From April 2015 if you die before taking your pension benefits up to the age of 75, the plan benefits may be paid to your beneficiary  tax free.

On death on or after age 75 the lump sum will be taxed at 45% (expected to be reduced to your beneficiary's highest marginal rate of tax from 2016/2017)

Cut to tax on death after buying an annuity
When choosing your annuity you can select to have your contract on a joint life basis (where the income continues to be paid to your spouse/ partner on your death) or one that pays to your spouse/partner over a fixed term following your death.  Historically your spouse/partner would pay tax on this income on their marginal rate.  The new rules state that it will be tax free if you die before age 75.

Transferring a final salary pension scheme (defined benefit)
Whilst it will be no longer possible to transfer from unfunded public sector pension schemes (e.g. Police Pension Scheme) if you have a defined benefit (e.g. final salary) pension you can transfer to a defined contribution pension (e.g. a Personal Pension Plan). But as you could lose very valuable benefits, you should seek regulated Independent Financial Advice first.

Retirement age increase
From 2028 the retirement age at which you may take your retirement benefits will increase to 57 and from then on increase in line with the rise in State Pension age, remaining 10 years below the State pension age.

IMPORTANT NOTE - This information is based on our interpretation of the current legislation. It is a broad summary and cannot cover all personal situations. You should not take, or refrain from taking, any action based on this information. Tax treatment can change and depends on your circumstances.  This information is not advice. If you are unsure what course of action is right for you, contact Pension Wise or a regulated financial advisor.