What the pension freedoms mean for you
By Paul Davies
What the pension freedoms mean for you
The pension freedoms represented a major shift in how you can access your pensions. Learn more what the changes mean for you and your retirement savings.
The changes of April 2015 represented a complete shake-up of the UK's pensions system, giving people much more control over their pension savings than before.
Which? can help you to navigate this complex area. Our video summarises the changes, and further down, we explain more about what they mean for you, and your options.
Greater flexibility - you are not forced to buy an annuity
The most radical change was people being allowed to access their defined contribution (DC) pension as they wish from the point of retirement.
With these types of pensions schemes, the amount you end up with when you come to retire is dependent on the performance of the investments into which you put your retirement savings.
Traditionally, people would buy an annuity with their pension savings and the annuity would pay a guaranteed income for the rest of their life. The new rules meant that you didn't have to do this - you can access all of your pension savings from age 55 and do whatever you like with them.
What are my options?
For most people with a DC pension, or pensions, buying an annuity was your only option when it came to converting your pension savings into an income. This is no longer the case since April 2015 - although people who want the guaranteed income provided by an annuity will still be able to go down this route.
So, if you have a £100,000 pension pot, you can still take up to £25,000 (25%) as a tax-free lump sum, but now have the following options:
- Take out the remaining £75,000 immediately, or in lump sums, and pay income tax at your marginal rate - 20%, 40% or 45%.
- Buy an annuity with the £75,000.
- Leave the £75,000 invested in the stock market and 'draw down' as much or as little as you want in income.
- Buy an annuity with part of your savings, leave the rest invested, or take it out your fund and spend it.
People can use their entire fund as they wish, but with this change comes the responsibility of making the money last and not spending it all as soon as you get your hands on it.
Find out more: Overview of options for cashing in your pension - the options in detail
More flexibility on income drawdown
Income drawdown had traditionally been a route that only people with a larger pension pot (in the region of £200,000-£300,000) had been able to consider. It allows you to keep your pension fund invested in the stock market, and draw out income as and when you wish. The changes meant that income drawdown became a realistic option for those with more modest retirement savings.
All new income drawdown arrangements set up after 6 April 2015 are 'flexi-access drawdown' products. This allows you to take out as much as you want each year (subject to taxation) and no longer has a minimum income requirement.
You can remain in capped drawdown if you set up your plan before 6 April 2015, but will obviously have to adhere to that cap. If you want to convert to flexi-access drawdown, you can do so by notifying your provider or breaching the cap by withdrawing more than you’d previously been permitted to.
Better death benefits
If you die during income drawdown, the previous arrangements meant you would pay 55% tax if you've taken tax-free cash or drawn income. The rules have changed to allow beneficiaries to take a lump sum or income tax-free if you die before 75 and at their marginal rate if you die after 75.
With annuities, your spouse, partner or beneficiaries now receive the payments from a joint life, guaranteed or value-protected annuity tax-free if you die before age 75. Payments are taxed at the beneficiary's marginal rate if you're over 75.
A joint-life or dependent's annuity is now be able to be paid to any nominated beneficiary after you die.
What if I've got a final salary pension?
People with a private final salary (eg defined benefit) scheme or a funded public final salary scheme are now able to take advantage of the new rules by transferring their money into a defined contribution pension.
However, you could lose valuable benefits by doing this, including a guaranteed income which is linked to inflation. You have to receive the appropriate independent advice if you want to transfer from a defined benefit to a defined contribution scheme.
Find out more: Defined benefit and final salary pensions.
As part of the pension changes, the it was announced that people about to retire will get free, impartial guidance on what to do with the money in their defined contribution (DC) schemes, (where your money has been invested and you decide what to do with it at retirement).
The guidance, which is called Pension Wise, was launched in April 2015 and is being delivered by independent organisations - The Pensions Advisory Service (TPAS) and Citizens Advice.
Once you call the main Pension Wise number (0800 138 3944) you'll be able to set up either a telephone consultation or a face-to-face session.
Find out more: What is Pension Wise?
- Last updated: April 2017
- Updated by: Paul Davies