Retirement Pensions New Rules  - How Will They  Affect You?

From April 2015 retirement pensions new rules come into force but do you know what they mean and how they could affect you?

Until recently when you retired you had to use your pension fund to purchase an annuity which would then give you an income for life.  

Unfortunately over the last few years annuities have been performing badly and have not being paying the income they did prior to the economic downturn.  

The Government announced in their 2014 Budget that they were making changes to the pension legislation so that everyone has the freedom to do what they wish with their pension pot.

From April 2015 you will not be forced to buy an Annuity although this still may be the best option for some, but can use your money in other ways. But don't get carried away!

Who the new rules apply to.

The retirement pensions new rules apply only to those with a defined contribution pension  or money purchase pension and not a final salary pension scheme. 

Up until now you had to invest most of your pension pot after taking a 25% tax free lump sum  into either  an income draw down investment or an Annuity. 

An income drawdown investment plan  is an alternative to buying an annuity.  Money is invested in stocks and shares and continues to grow whilst giving you a regular income by cashing them in over time.

25% of each drawdown is tax free.  If you are prepared to take the risk and you have a large pension pot of £100,000 or more the rewards can be higher than an annuity.

Income drawdown has previously only been available to wealthier retirees.  The plans can attract high fees and charges and they won't be the right choice for everyone that's why it's so important that everyone seeks advice as to which option is going to be the best for them.

An annuity is purchased from an insurer outright and gives an income for life.

Anyone retiring in or after April under the retirement pensions new rules will have a choice as to how and when they draw their pension and how much pension they take.

Under the retirement pensions new rules pensioners will have three choices:-

  • Buy an annuity which provides an income for life
  • Move a pension into an income drawdown, keeping it invested and draw on it or
  • Keep your pension where it is and take multiple lump sums with the first 25% of each tax-free

Those who choose either of the first two options  can still take a lump sum of up to 25 per cent tax-free.

What if I have a Final Salary Scheme Pension?

A final salary pension pays out a guaranteed percentage of your salary each year during retirement.  These pensions have always performed well and are the most coveted of employee benefits. 

However a lot of private companies have now stopped them.  The retirement pensions new rules will make it possible for anyone with a final salary pension to transfer the value of their pension pot into a defined contribution scheme which then would enable them to control when and how they take their income. 

However most pension experts would advise against this because of the guarantees a final salary member may be sacrificing such as  inflation protected income and guarantees to pay a spouse a regular income if the scheme member dies.

Public sector workers who still have these types of pensions are not allowed to transfer their pensions.

What happens to my pension when I die?

The current 'death tax' a 55 per cent tax rate that applies to pension pots in drawdown left to children if the owner dies will be axed under the retirement pensions new rules.

Instead, beneficiaries will either pay no tax if the owner dies before age 75, or their normal income tax rate - with the money they receive added to their earnings to calculate this - if they are 75 or over.

Husbands and wives whose partners die before reaching 75 will get annuity income from their spouse's pension tax-free.

Beneficiaries of 'joint life' annuities or other types that come with death benefits currently pay income tax on what they receive.

What are the risks with the retirement pensions new rules?

expensive sports carGoing on a mad spending spree might not be the best option!

The new rules will allow anyone over the age of 55 to access their entire pension pot and there is a real danger that  people will see it as a windfall to pursue whatever dream they may have rather than be sensible and realise that the money has to last them for the rest of their life.   You can't replace a pension (unless you win the lottery!)

The other risk is that there will always be rogue traders who will see it as an opportunity to defraud people out of their retirement savings by selling them worthless or risky investments.

Without the right advice people who are unfamiliar with investing could make the wrong decisions and lose money.

Retirees could overpay tax or lose benefits by taking too much money out at once, miscalculate their state pension and spend more of their savings than is prudent.

The message that is coming over loud and clear from everyone in the industry don't make any decisions in a hurry.  Before making any decisions it is really important that you take independent financial advice that will take into account your own personal circumstances and needs.

Everyone coming up to retirement will be offered free money guidance sessions to help them get the most out of the freedom reforms.

Operating under the banner 'Pension wise', they are being offered over the phone and online by The Pensions Advisory Service  and in person by the Citizens Advice Bureau.

That means they are independent from the pensions industry, and therefore above suspicion that the help will be self-interested in any way.

Go here for more information and a list of places where people can get face-to-face meetings.

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