[Spec web page for an imaginary pensions provider, giving information on the changes to pensions in 2015]
The government is making big changes to pensions this year. If you are 55 on or after 6 April 2015 you will be free to do whatever you want with your personal pension money, without having to buy an annuity.
You can leave your pension where it is, take it out in one lump sum or you can use it like a bank account and draw money out whenever you want.
Before you rush to cash in, it’s important to know the options, the risks and the tax implications. The changes might mean more freedom but you could end up paying more to the taxman and losing out in the long run, so it’s crucial to get detailed advice before you make any decisions. In the meantime, here are a few answers to the questions you might be asking.
Am I affected?
Yes, if you are 55 on or after 6 April 2015 and you have been paying into a pension. This could be a private scheme or an employee scheme. If your pension is based on your final salary, you probably won’t be affected.
Okay, I’m elegible. What are the options?
- Take it all in one lump sum. This means you can pay off debts, invest in property or spend it however you like. The first 25% is tax free, the rest is taxed at your marginal rate, which varies according to how much you withdraw.
- Take it out bit by bit like a bank account. Each time you withdraw, 25% will be tax free and the rest will be taxed as income. There are all kinds of options on the market that let you do this in whichever way you want.
What’s the catch?
If you take it all in one lump sum, you could end up with a very big tax bill. For example, if your pension is £500,000, you could pay £157,888 in tax, so it might be better to take it gradually in smaller amounts. Either way, you need to make sure you don’t run out of money as you get older and end up relying on a state pension.
Should I leave it where it is and wait?
It might be tempting to take all your pension now but remember that pensions are a very good way tax-efficient of saving. Investing in something else (buy-to-let property, for example) could leave you worse off in the end.
Now I’m confused.
It’s not surprising. That’s why the government has promised to offer everyone free guidance from 6 April. For a face-to-face session, contact the Citizen’s Advice Bureau, or you can call the Pensions Advisory Service for guidance over the phone. Take note, though: this is general guidance and is not tailored to you. For personalised advice, you should speak to a regulated, impartial financial advisor.