We now have more control, choice and responsibility over our retirement savings than ever before. But it is important to understand what this means at every step of retirement planning, from saving towards retirement, to taking an income and preserving what’s left for our families.
Freedom and Choice, the government response to previous consultation, is a game changer for defined contribution pension schemes and most personal pension plans. However the new rules do not and were never intended to impact on final salary or defined benefit arrangements. For members in defined contribution and personal pension schemes it will result in more choices at retirement. The new freedoms make pensions look more attractive and will hopefully encourage more of us to save as people envisage being able to use their savings when and for what they wish once they reach age 55. Moreover the new flexibilities move the emphasis on personal choice at retirement rather than during the savings or accumulation phase.
On the other hand the income tax structure and more generous death benefits counter-balance the impulse to take short-term gains by providing a strong reason for people to be more circumspect about how much they take out of their pension, especially if they need their income to last until they no longer need it.
The key changes in relation to accessibility can be broadly summed up in the following headlines:
- From age 55 an individual can take a tax free cash entitlement from their pension pot and/or income payments at any level.
- Any income taken will be taxed at the individual’s marginal rate of income tax
Essentially the new rules provide the opportunity for everyone to be able to draw on their pension however they please. Pension companies offering flexi-access will allow plan holders to take as much or as little as they want from their pension whenever they want and however they want to take it.
There are also significant changes on pension death benefits. Previously lump sum benefits on death were taxed at a massive 55% but this has now been scrapped. The new reforms remove tax charges on death benefits where the member dies before age 75, reduce tax charges payable on death benefits paid where the member dies after age 75 and provide the ability for non-dependent beneficiaries to take income from inherited pension funds.
So pensioners will be able to nominate anyone they like to receive any remaining pension funds, and those beneficiaries can in turn nominate further beneficiaries if the fund hasn’t been used up by the time of their death.
Freedom and choice indeed but with that comes increased personal responsibility and a need to ensure a full understanding of the new rules since the wrong decisions could prove costly.