Easy Guide to the New Pension Rules 2015
From April 2015 the rules relating to the use of your pension changed. If you are aged 55 or over, you are now able to access and use your pension pot in any way you wish. This is to provide you with more flexibility and choice about how your pension is used, and hopefully encourage more people to actively save and plan for retirement.
The new choices regarding your pension enable you to:
- Withdraw 25% of the pot tax-free and then convert the remainder into a taxable retirement income
- Withdraw 100% of the pot all at once - 25% will be tax-free and the remaining 75% will be taxed as a lump sum income
- Withdraw 100% of the pot in instalments - 25% of each instalment will be tax free and the remaining 75% of each instalment will be taxed
Further, you will no longer be obliged to purchase an annuity (but this still remains an option).
What is an annuity?An annuity is a financial product in which the total sum of your pension savings are invested, and a regular income is generated. An annuity quote will be expressed as a percentage, so the amount that you receive in income will be determined by the amount that you have invested.
Eg. Brian has a pension pot of £400,000. A 6% annuity would therefore give him an annual income of £24,000. Betty has a pension pot of £80,000. A 6% annuity would therefore give her an annual income of £4,800.
Even if you have started making withdrawals from your pension fund, you will still be able to continue to make savings and benefit from tax relief for doing so.
Other changes to the pension rules include an overhaul of the rules relating to pensions after death. Currently, any sum left in your pension fund passes to your beneficiaries after your death. Previously this sum was taxed at 55% (the "death tax"). Now, any payments made after 6 April 2015, (regardless of when pension holder's date of death) will be subject to the new rules. These are:
- The 55% death tax has been abolished.
- If you die before the age of 75, any sums invested in your pension will pass to your beneficiaries tax-free.
- If you die after the age of 75, your beneficiaries can:
- Withdraw money from your pension fund in instalments, which will be taxed at your beneficiaries' usual tax rate, as part of their income.
- Withdraw money from your pension fund as a lump sum. Until April 2016, this will be taxed at 45%. After April 2016, this will be taxed at your beneficiaries' usual tax rate, as part of their income
Warnings following the changesThe Money Advice Service has warned pension holders that whilst you now have greater flexibility regarding what you do with your pension, it is important that you carefully consider what you do with your pension pot. Being able to withdraw 25% of the sum tax free is a substantial tax break. However before withdrawing a large lump sum, it is important to consider the retirement income that will be generated from the remaining sum - is this enough for you to live on? Will it cover your expenses? If not, how do you plan to pay any shortfall?
Pension ScamsUnfortunately fraudsters have taken advantage of confusion over the new changes to the pensions rules which has led to a number of pension scams. Pension scams could lead to you losing your savings, and you could also face a hefty tax penalty.
Avoid becoming the victim of a pension scam by following the tips below.
- It is not usually possible to make withdrawals from your pension before the age of 55 unless you are terminally ill. If anyone says that they can helps you do so, particularly without asking for any information about your circumstances, this is almost certainly a scam
- Do not deal with any financial advisor who is not registered with the Financial Conduct Authority for pension transfers
- Do not deal with any cold callers, unsolicited text messages, or any door to door sales people, particularly if they pressure for a quick decision
- Beware of any financial products marketed with the terms 'one-off investment opportunity', 'early pension release', 'pension loans', 'loopholes' or 'overseas investments'
If you think that you may have been the victim of a pension scam, contact Action Fraud at www.actionfraud.police.uk or call Action Fraud on 0300 123 2040 Monday to Friday 8am to 9pm, and at weekends, 9pm to 5pm.