How are pensions now more flexible?
The need to exchange your pension savings for an annuity to provide an income for life has been removed. You can withdraw your money as you wish, subject to your marginal rate of income tax. The amount of tax you will pay will depend on the amount of other income you have in that year.
Also, the 55 per cent ‘death tax’ on pension pots left invested has also being scrapped, so your loved ones can benefit after you’ve gone.
So I can just take the money as I wish?
Yes, but only 25 per cent tax-free. After that you pay tax on anything you take out over the current annual tax-free personal allowance threshold of £10,600 (2015/2016). Any withdrawals will be added to any other income you receive when calculating your tax bill for the year.
“There’s a lack of understanding of the tax implications of taking lump sums, so it’s vital people receive professional financial advice,” says Andrew Tully at MGM Advantage. There’s also the danger that you could run out of money.
- Tip: Use the MGM calculator to see how much tax you could pay on lump sum withdrawals.
What’ s wrong with an annuity?
“This has been the traditional way of funding retirement, however rates are low (currently 6% for a healthy 65-year old) and don’t let you pass on to your children as easily,” says Scott Mullen at My Pension Expert. But importantly, there’s no danger of money running out.
- Tip: Yours with Key offers a hassle-free annuity service. Call 0808 156 9011 or find out more here.
What are the alternatives to a traditional annuity?
Much more flexible products, including:
- Fixed-term annuities – which provide a pension income for a set number of years and a fixed sum at the end. You can also review options in future (unlike traditional annuities).
- Income drawdown – where you take sums out of your pension while the rest remains invested.
“Both are set to become popular, thanks to the death benefits changes, because they can now be passed on,” says Scott Mullen. “But with greater levels of flexibility and choice, the need to seek advice is greater than ever.”
Anything else I should know?
Over-55s can get a free State Pension statement, estimating what you’re likely to receive based on current national Insurance records. Call 0345 300 0168, or visit gov.uk/state-pension-statement.
- Tip: Read our guide to getting your state pension statement here.
Who can help my decision-making?
Pension Wise offers free information –
visit pensionwise.gov.uk. Remember this is ‘guidance’ not tailored advice.
Did you know...
Despite new pension freedoms, 62 is the most popular age to start accessing pension income. And just over a quarter of retirees (28%) plan to use their cash-lump sum to pay off debts, while 13 per cent will pay off their mortgage.