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, with the aim of giving retirees the choice over how they used 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 is here to offer pension freedoms advice, carefully tailored specifically for your situation to ensure that you can enjoy the best possible retirement.
What did pensions look like before the pension freedoms?
There is nothing new about the 25% tax free cash lump sum. Age 55 is still the earliest you can start to draw on your pension fund. However, before 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 – 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 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.
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. We’ve compiled a list of the pension freedom rule changes here:
Lump sum withdrawals
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. Acumen strongly recommends 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.
Flexible drawdowns give you the option to put some or all of your pension fund into an invested 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.
Acumen can review your current investment strategies, and advise you regarding other retirement and financial planning strategies. For more information regarding the pension freedoms, or for tailored pensions advice, contact Acumen today on 0151 520 4353 or email us at firstname.lastname@example.org.
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 advice. We will always put your long-term best interests at heart to ensure that you can enjoy a long and comfortable retirement.