21st July 2014
Following the changes announced in this year’s Budget, from 2015 savers will be able to do as they please with their nest-eggs.
We round up the key points the Treasury has highlighted in regards to the new system, explain how they will work and what they mean for you.
1. The system is being completely revamped
In order to create greater choice and flexibility for people who have saved hard for their pension, the government announced at Budget 2014 a series of changes to how people access their pension. From April 2015, no matter how much you decide to take out from your pension after retirement, you will be charged the normal rate of income tax you pay on your salary (so either 0%, 20%, 40% or 45%) rather than the previous tax charge of 55% for full withdrawal.
2. 25% of your pension pot will remain completely tax-free, as it was before
You’ll be able to access 25% of your pot in one go without paying any tax.
3. Will the changes just apply to people with ‘defined contribution’ pensions?
This is a type of pension also known as a ‘money purchase’ scheme whereby the amount you get when you retire usually depends on how much has been paid in and how well the investment has done. But the Treasury has now announced that people who have a ‘defined benefit’ scheme will benefit too. A ‘defined benefit’ also known as a ‘final salary’ pension is typically a promise of a certain level of pension in retirement which is linked to your salary. Therefore people in the private sector or in a funded public sector scheme will still be able to transfer from a defined benefit pension scheme to a defined contribution one if they want to, meaning they can benefit from the changes. This means that around 18 million people will ultimately be able to withdraw their pension flexibly should they wish to do so.
4. Everyone who will be able to take advantage of the new reforms will be able to access free and impartial guidance
The Treasury is offering free advice with the aim of helping people make confident and informed choices on how they put their pension savings to best use. This guidance will be available through a number of different channels – via an online tool, over the phone, or face to face. Individuals will be able to choose the channel, or mix of channels, that they find most convenient. It will not be provided by anyone who can sell a product and accessing the guidance will be arranged by your pension provider, who will be required to tell you about it.
5. The changes will come into effect from April 2015
If you are over the age of 55, or will be from April 2015, you will be able to take advantage of the new system from then. If you’re younger than 55 then you will be able to take advantage of the new system when you do reach 55.
6. You don’t need to do anything yet
If you’re thinking about retiring soon, you don’t need to do anything in the meantime. Savers can find more information about the pension reforms on the factsheet published earlier this year explaining the differences between the new changes and the old system.