10 things about the wide-ranging pension changes you should know

10 thingsHere are 10 things about the pension changes you should know…



1. The pension system is completely being overhauled to enable individuals to take their defined contribution pension how they like in order to create greater choice and flexibility. These changes were announced in Budget 2014. From 6 April 2015, no matter how much an individual decides to take out from their defined contribution pension after retirement, withdrawals from their pension will be treated as income; the amount of tax they will pay on what they withdraw will depend on the amount of other income they have in that year, as long as you are 55 or over. This is instead of being taxed 55% for full withdrawal, as it has been previously.

2. The pension reform changes hinge around individuals no longer needing to use their defined contribution pension pots to buy an annuity, a product which typically provides them with an income for the rest of their life. Instead they will be able to keep their pension invested and draw on it as required, or even cash in their entire pension.

3. Subject to the individual’s pension scheme rules, up to 25% of their pension pot will remain completely tax-free, as it was previously.

4. The changes announced apply to individuals with defined contribution pensions, also known as a ‘money purchase scheme’. This is when the individual pension scheme member and, if applicable, their employer both pay into their pension scheme which is invested by a pension provider. The amount received at retirement usually depends on how much has been paid in and how well the investment has performed.

5. Some individuals who have a defined benefit scheme will benefit too. A defined benefit pension is typically a promise of a certain level of pension in retirement which is linked to salary. People in the private sector or in a funded public sector scheme, if appropriate, 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. Those in unfunded public sector schemes will not be able to transfer.

6. Individuals can pass on their pension to others without paying any tax. Instead of the 55% rate of tax when passing on their pension, people who die under 75 with defined contribution pensions can, from 6 April 2015, pass on their unused pension as a lump sum to a person of their choice tax-free. During the Autumn Statement 2014, the Chancellor George Osborne also announced that from 6 April 2015, payments from certain kinds of annuities that pay out income after death (joint life and guaranteed annuities) will be tax-free when paid to a beneficiary, if the original policy holder dies below age 75. For people who die over the age of 75 with unspent defined contribution pensions, they can pass this on to a person of their choice who will be able to take it as a lump sum taxed at 45% or as income and pay their normal rate of Income Tax.

7. Everyone who is eligible to take advantage of the new reforms will be able to access free and impartial guidance. This is to help people make confident and informed choices on how they put their pension savings to best use.

8. The pension provider or scheme will be required to tell individuals about the guidance and how to access it. Pension providers or schemes will be required to tell people about the guidance service in the information they send to people when they are approaching retirement.

9. If someone is over the age 55, or will be from 6 April 2015, they will be able to take advantage of the new system from then, subject to their pension scheme rules.

10. If someone is younger than 55, they will be able to take advantage of the new system when they reach normal minimum pension age under the tax rules (this is currently age 55).

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