How you could benefit from the new pension rules

The new pension rules are revolutionary, providing flexibility that could help you to be more financially comfortable. Having unprecedented access to your fund carries a lot of responsibility, but with careful consideration you can make the freedoms benefit you in retirement.

When thinking about your retirement, you should pay attention to what you would like to do when you stop working. Whether it’s taking the dog for long walks, spending more time gardening or at social clubs, knowing what you want will help you plan more efficiently.

Possibly the most publicised aspect of the new rules was that people would no longer need to purchase an annuity. Although the security of a guaranteed income is very appealing, the irreversible nature of annuities and low rates of recent years mean they could lock people into low-paying contracts for the rest of their lives, especially those with smaller funds. For example, a 60-year-old woman retiring in good health with £50,000 could receive an income of just £1,888 a year - or £30 a week*. If she wanted to increase the income each year or for her husband to receive an income after she died, it would be worth even less.

Flexible retirement

The new rules also allow you to create a fluid retirement plan; rather than relying on an annuity you could have a mixture of options. One example of this would be:

  • Defer the state pension, which currently grows 10.4% each year that it is deferred
  • Draw down your personal or workplace fund
  • Use pension release to take up to £12,500 of a £50,000 fund as tax-free cash, which could be used to tackle the mortgage (as clearing debts before saving can be an effective strategy)
  • Downsize from the three-bedroom semi-detached house to a smaller property as the children are grown up and moved out. This would not only free up some capital but also reduce or eradicate the mortgage, providing a boost to your income and helping to minimise a lifestyle change in retirement – allowing you to continue taking an annual holiday for instance.
  • Begin taking the state pension, which will now provide a higher income as a result of being deferred

If you then annuitised the remainder of your pension fund, you would have a guaranteed income for life and the security of your own mortgage-free home.

It’s also now possible to leave a pension fund to any beneficiary, not just a family member. This creates new possibilities for inheritance and providing for others, although it’s important to know that if you pass on the fund before your 75th birthday they will pay no tax on it at all, whereas if it is passed on after they will pay income tax on withdrawals.

You can still use existing options

The new pension rules are not mandatory, so you can still purchase an annuity if that is your preference.You can also enter a drawdown plan and although capped drawdown no longer exists except for existing policies, you can set an annual income. However, bear in mind that annuities are not currently reversible, so don’t purchase one with the intention of selling it later on. 

How will you use the new pension rules? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

Important Information

The quote for an annual income, retrieved on June 23 2015, is based on a 60-year-old female in good health taking 25% tax-free cash and purchasing a standard annuity with no escalation. 

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:

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