What the new pension rules mean for you

Please note: The information in this article was correct at the time of writing. Since then, the government has scrapped plans for a secondary annuity market. Please visit our blog to find out more.

You may be wondering how the new pension rules could affect your retirement options. You might even think that they don't matter because you're still planning to buy an annuity regardless of the new options – but even then, you should be aware of the changes to the death tax. The new pension rules are varied and important. Here’s a quick rundown of what they are:

Uncrystallised fund pension lump sum (UFPLS)

One of the biggest changes is the ability to withdraw money without crystallising your fund. This would mean you could remove some money from your pension at 55, perhaps to clear credit card debt, without committing to income drawdown or an annuity.

Research has shown that 44% of people who take out a payday loan do so in order to afford essentials – including food – or mortgage payments. There are some months when the money simply will not stretch to cover everything, especially if an unforeseen incident occurs.

In April 2015 the new pension rules took effect and now you may be able to dip into your pension and cover the expense that way. A quarter of the withdrawn sum will be tax free and the rest added to your earnings for the year, and, unlike a loan, there are no interest charges or repayments to worry about.

Flexi-access drawdown

Like previous drawdown plans, flexi-access drawdown allows you to access up to 25% of the fund as a tax-free lump sum and receive an income with the rest. However, this new type of drawdown removes the limits on how much you can take in a year, so you can vary your income as needed.

However, by entering flexi-access drawdown the amount of money you can contribute to a pension and receive tax relief on reduces from £40,000 a year to £10,000 a year.

Annuities

Overall, the new pension rules have not changed annuities. Clients still exchange their pension fund – in part or in whole – for an income for life. The main change for annuities affects what happens on death, as the next section explains.

Although not much has changed for now, big changes seem to be on the horizon: the former pensions minister, Steve Webb, previously stated he would like annuities to be reversible, so that people can be bought out of their plan and receive a lump sum payment instead, and Chancellor George Osborne has confirmed a secondary annuity market will be permitted in 2017.

Death tax 

Under previous rules, a 55% tax was applied on pensions at death, including annuity income in a joint life or fixed-term annuity left to a beneficiary. The new pension rules change this: now, if a person dies before they turn 75 then their pension will be passed on entirely tax free. If they die after 75 their beneficiary will pay income tax on any withdrawals or income from the pension – as such, if they do not touch the fund, or withdraw sums that are within their personal allowance, they will not pay any tax.
 

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This article was originally published in February 2015 and has been updated. 

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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