The pension freedoms announced by George Osborne back in 2015 came into practice at the start of the 2015/16 tax year. These radical reforms apply to defined contribution pensions, to give retirees the choice over how they use their pension pot.
Steve Webb, then Pensions Minister, famously said: “If people do want to get a Lamborghini and end up on the state pension… that is their choice.” Acumen Financial Partnership is here to offer pension freedoms advice, carefully tailored specifically for your situation to ensure that you can enjoy the best possible retirement.
Here at Acumen, we are proud to call ourselves experts in pension freedoms. Our helpful and informative team is on hand to answer any questions you may have and can offer tailor-made pension advice. Why not read our handy Pension Advice FAQ page to learn more about pensions and the pension freedoms.
What did pensions look like before the pension freedoms?
There is nothing new about the 25% tax-free cash lump sum you can receive as a result of the pension freedoms. As always, 55 is still the earliest age you can start to draw on your pension fund. However, before the pensions freedoms, there were strict rules about how you could take the rest of your fund. You could use something called ‘capped drawdown’ to take your income but there were limits on how much you could take at any one particular time – hence it being called ‘capped’.
The other option was to buy an annuity. Annuities meant that you handed control to an insurance company in exchange for a guaranteed income for the remainder of your years. If your circumstances changed after that there was nothing you could do about it.
Small pension pots could be cashed in completely, 25% would still be free of tax and the balance would be added to the rest of your income and taxed at the highest rate you paid. These small pots were called ‘trivial pensions’. To qualify for this option, you had to be aged 60 or older, and you had to be able to add all your pensions up and have a total less than £18,000 (increased to £30,000 in 2014).
After you had drawn your cash and income, you had to have nothing left in the pension fund at the end. Due to the changing way in which pensions operate now, it has become more important than ever to seek out tailored pension advice from an Independent Financial Adviser, like Acumen. Why not contact one of our team for expert pension advice or read our handy guide on how to prepare for your pension and retirement?
What pension freedoms rules were introduced in 2015?
With the introduction of the pension freedom reforms came major changes to the way people could spend their pension fund. Here at Acumen, we have the knowledge and expertise to help you understand the implications of the pension freedoms reforms. Read on to find out more about the types of pension freedoms you can benefit from and to find out more about how our expert team can help you with independent pension advice.
What are the pension freedom rule changes?
As a result of the introduction of new pension freedom rules, there are three new major changes to how you can withdraw and spend your pension fund.
One of the most controversial and talked about elements of the pension reforms is the ability to withdraw some or all of your pension as a lump sum. Once again, 25% is tax-free but the remainder won’t be. Here at Acumen Financial Partnership, we strongly recommend consulting an Independent Financial Adviser (IFA) before embarking on this course of action.
It is imperative that you are fully informed and have considered the long-term implications for your retirement funds – and subsequent living standards – as well as the possible tax bill if you decide to withdraw your pension funds fully or in part.
As a result of the pension freedom reforms, flexible drawdown gives you the option to put some, or all, of your pension fund into an investment fund. This allows you to take out any amount, over as long or short a period of time as you want, provided you are happy to pay the tax on it. You still have the 25% tax-free element within this option.
The pension freedoms also introduced new rules for death benefits. Regardless of whether you choose a flexible drawdown or a lump sum, your remaining pension funds can be passed down to the next generation. You can even leave a tax-free income, but only if you die before the age of 75. After 75, the funds are taxed at the marginal rates of income tax.
Do pension freedoms apply to all types of pensions?
The pension freedoms only really focus on private pensions in which either you or you and your employer, have saved up a pot of cash for retirement. These are generally referred to as a defined contribution or money purchase pension. This means that the pension freedoms do not apply to state pensions or any pension in which you will be paid a proportion of your final salary. This type of pension is referred to as a defined benefit pension.
Expert pension advice from Acumen Financial Partnership
Contact our team of expert Independent Financial Advisers for clear, tailor-made pension freedom advice. Our team can review your current financial situation and devise retirement and financial planning strategies that will help you get the most out of your retirement.
Our IFAs are extremely knowledgeable about the pension freedom reforms and wider pensions landscape. We pride ourselves on taking the time to get to know you and your situation first, before offering tailored pension advice. We will always put your long-term best interests at heart to ensure that you can enjoy a long and comfortable retirement.
The pension freedoms only apply to defined contribution pension pots. Not to be confused with defined benefit pension pots, which are often called ‘financial salary’ pension schemes. As long as you are not already taking your pension, you can transfer your pension fund to a defined contribution pension fund from a defined benefit pension. However, you should discuss this with your IFA before taking any action.