Managing the New Pension Flexibility
Changes introduced from 6 April 2015 allow people the flexibility to access their pension savings more freely and easily than before. In fact, you can use them rather like a bank account. If you would like more information on the main changes, ask Tax Help for Older People for their guide which aims to help you understand the tax treatment of the options available within the new, more flexible, regime.
The rules are complex, but we thought you might find it useful to understand these key points:
Pension flexibility came in from 6 April 2015
If you are over 55 and have a ‘defined contribution’ or ‘money purchase’ pension, your pension provider might allow you to take what you like, when you like, from your pension
The three main choices available will be:
- i. To withdraw all of the money in one go
- ii. Leave it in the scheme and take a regular or occasional income
- iii. Buy an annuity or enter into a ‘drawdown’ arrangement
- A combination of all three
Rules about selling existing annuities do not come in until 6 April 2016
Defined benefit’ or ‘final salary’ pensions will still have stricter rules
It is still possible to take money out of defined benefit schemes under the existing trivial commutation rules. The taxation of these payments differs from the new flexible rules
There is no rush!
Just because the new rules start in April 2015, you do not have to decide now. Consider everything – your circumstances (personal and financial), investment choices, future plans and, importantly, tax consequences
Know the tax consequences of your decision
You are allowed to take some money out of your pension tax free. But plan ahead. Three-quarters (75%) of your pension savings will count as taxable income and will be added to your other income, which may give you an extra tax bill
Understand the tax ‘paper trail’
Money from pensions will be taxed under the Pay As You Earn (PAYE) system. You might not pay the right tax at the right time and may need to claim a tax refund or pay some more tax later on. If you take all of your money out, you can usually claim back overpaid tax immediately. If you leave some money in your pension you might have to wait until the end of the tax year to get your refund or be told you owe tax
Take further advice
Use the Government’s guaranteed ‘Pension Wise’ guidance. Get specialist advice on your tax position and watch out if you claim tax credits or state benefits – check the effect of your decision on your entitlement. Beware, DWP may ask questions if they believe you have impoverished yourself by using or giving away your pension and then later apply for benefits
This article is by Tax Help for Older People registered charity no 1102276, offering free tax advice to older people on incomes below £20,000 a year. The Helpline number is 0845 601 3321 or geographical 01308 488066.
