7 benefits of the new pension rules
The pension changes made earlier this year could affect your retirement plans for the better, as they offer more flexibility and control over your money.
Here are seven key advantages of the new pension rules and how they could benefit you:
Cashing in your pension
One of the most controversial and publicised reforms is the ability to cash in your entire pension pot. You must be at least 55 years of age, and as there is no longer a requirement to convert your pension into an income, you can spend your money however you wish. Although, it may be your only provision for an income in later life so there should be a good reason for cashing it in.
For some, cashing in their pension instead of using it to take an income can make a lot of sense, especially for people with a small pension. For example, if you were to purchase an annuity with £10,000 you would receive an annual income of around £359, or just £256 if you were to withdraw tax-free cash*. This would certainly not provide a sufficient income stream throughout retirement so in some circumstances cashing in your pension can be a suitable option.
More control over your money
The flexibility to cash in your pension can open up opportunities and allow you to plan your retirement the way you envision it. For some this means starting up a new business, purchasing a newer car or tackling debt before leaving work. Other reasons why people may have taken advantage of the new pension rules are to help relatives, pursue a hobby or simply to enjoy the money now, for example by going on holiday.
Release your tax-free cash
Prior to the April pension changes it was possible to release up to 25% of your fund as tax-free cash, known as pension release, and it is still possible to do so. You can only take pension release if you are not already withdrawing money from your fund and are at least 55 years of age. The remainder of your pension is subject to your marginal rate of income tax.
Tax advantages of saving into a pension
There are many pension tax benefits that remain following the new rules including tax relief on contributions, tax-free growth and up to 25% tax-free cash. As a result, pensions are one of the most tax-efficient savings vehicles and can significantly boost the value of your savings. Currently, basic rate taxpayers receive 20% tax relief on contributions and higher rate tax payers receive 40%. However, this could change after the next budget as Chancellor George Osborne considers restructuring the pension tax system to make it easier for people to understand and incentivise saving into a pension.
Greater choice over how to use your pension
The April changes challenge the traditional option of purchasing an annuity. Two of the available options are flexi-access drawdown and protected pensions.
Under new pension rules all pension drawdown plans are now flexi-access plans that allow you to withdraw as much as you like whenever you need it. Protected pensions offer a guarantee against any falls in the stock market so your income will not be affected if the stock market crashes.
The variety of options available provide more flexibility and can give you more control over your financial future.
The death tax has been scrapped
Pensions are no longer subject to a 55% death tax and beneficiaries can receive more of the money their loved ones left behind.
If a pension holder dies before the age of 75 the beneficiary will not pay any tax on withdrawals from the fund. If they die after the age of 75 the recipient will pay their marginal rate of income tax on withdrawals.
Using pension release to tackle debts
Pension release, which hasn’t been affected by the new pension rules, can be an effective way to tackle high interest debt such as a car loan or credit card bills. Debts often have higher interest rates than savings vehicles and it makes little sense to pay more interest on your debt than you are gaining through your savings. For some it may be more effective to release money from their pension to tackle debt and reduce the amount of interest they would otherwise have to pay.
If you’re thinking about releasing money from your pension it is essential that you seek regulated financial advice as the decision you make now will affect the rest of your life.
You might consider seeking advice from your family and friends, however it is unlikely that they have enough knowledge of pensions to provide advice that you can trust as there have been sweeping changes this year.
As pension specialists we have the knowledge and expertise to make a recommendation that is suitable for your circumstances and that will give you peace of mind that you have made the best possible decision for your future.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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