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Personal pensions: What do the new pension rules mean for your retirement?
The government announced changes to pension rules which came into effect from 6 April 2015. They provide more flexibility and choice on how you can take your pension. We show you what the main changes are and how they will affect you in retirement.
Please bear in mind that tax rules are subject to change. The effects of tax rules on you will depend on your individual circumstances. We don’t offer tax advice so if you’re unsure, please seek it independently.
You could take some of your pension pot as a cash lump sum, but not all of it, unless the total of your pension savings is less then £30,000.
Your cash lump sum could be up to 25% of your pension savings and is tax-free. But, unless your pension savings are less than £30,000 you need to use the rest to buy an annuity or set up ‘income drawdown’.
You have the flexibility to take out as much of your pension pot in cash and you can do this how you want. The first 25% you take is tax-free and the rest will be taxed as income.
There are several options available to you and these will depend on your personal circumstances.
25% is tax-free and 75% is subject to income tax
When can I start taking my pension?
Current rules state you can start your pension at 55. This will continue but is set to rise to 56 by 2020 and 57 by 2028, and possibly higher later.
What are my options to take an income?
I want to take some money out but leave the rest invested to give me an income in retirement.
If you had a minimum pension income of £12,000 you qualified for flexible drawdown. This meant that you could withdraw all of your pension fund if you wished or you could invest your pension fund and take an income of up to 150% of the GAD rates. In both cases the first 25% of the pension fund was tax-free and the rest was taxed as income at your marginal rate.
You no longer need to have a minimum guaranteed income. You can use Flexi-Access Drawdown (FAD) to withdraw as much or as little of your pension as you like. Or Uncrystallised Fund Pensions Lump Sum (UFPLS) to withdraw all of your pension savings.
The first 25% of each pension you hold is tax-free and the rest is subject to tax in the year that it’s drawn as income.
I want to take out all of my pension savings
When you started to take a pension, 25% could be taken as lump sum tax-free, with the rest subject to income tax at up to your marginal rate. You needed to use the rest to provide an income:
- 1. You could buy an annuity to give you a defined level of income.
- 2. You could withdraw a maximum level of 150% of the Government Actuary’s Department (GAD) rate from your personal pension each year. This basically meant you could take 150% of the amount available under an annuity.
- 3. If you had £12,000 of income from other pensions, you could use flexible drawdown to withdraw the full value of your pension. But all amounts over the 25% tax-free lump sum were subject to income tax.
There are no restrictions on the maximum amount that you can withdraw.
UFPLS - This is called Uncrystallised Fund Pensions Lump Sum.
FAD - Flexi-Access Drawdown means you can take out as much or as little of your pension as you like.
25% - The first 25% of any lump sum withdrawals are tax-free but you will pay income tax at your marginal rate on the remainder.
I want a steady income in my retirement
The new rules still give you options to consider, but you no longer need a minimum income level to take your pension in a flexible way. Your choice will depend on your personal circumstances.
- Purchase an annuity
- Take an income drawdown
- Purchase an annuity
- Take Flexi-Access Drawdown
- Do both and split your pension pot
The Tapering of the Annual Allowance
This measure will restrict pensions tax relief by introducing a tapered reduction in the amount of the annual allowance for individuals with income (including the value of any pension contributions) of over £150,000 (where earnings excluding pension contributions are not less than £110,000). Those with income above £150,000 will see their annual allowance reduced by £1 for every £2 of income in excess of £150,000, until the allowance reduces to £10,000.
What about my Annual Allowance for pension contributions?
- 100% of your earnings or £40,000, whichever is lower. If you weren’t earning enough to pay income tax, you could still receive tax relief on pension contributions of up to a maximum of £2,880.
- You could carry forward any leftover Annual Allowances from the last three tax years, as long as you had enough earnings in the current tax year and a pension fund in the earlier year(s).
The rules are as before, unless you use FAD or take UFPLS. If you do:
- You wouldn’t have the Annual Allowance to make future contributions to pensions.
- Instead you’ll have a Money Purchase Annual Allowance (MPAA) of £10,000 per year or 100% of your earnings (whichever is lower).
- And you wouldn't be able to carry forward any unused allowances from previous tax years.
What about my Lifetime Allowance for pension contributions?
This is currently £1.25m and will fall to £1m from April 2016. Anyone with a large pension built up while the Lifetime Allowance has gradually reduced can ‘Protect’ their savings if they apply to HMRC.
What happens to my pension fund when I die?
If you died age 75 or above
Your remaining pension fund would be taxed at 55% if it was taken as a lump sum.
If you died before age 75
So long as you hadn’t started taking benefits, your pension fund could be paid tax-free as a lump sum to your beneficiaries.
If you die age 75 or above
Your remaining pension fund will be taxed at either:
- The beneficiary’s income tax rate if taken as income or;
- At 45% if taken as a lump sum (this is expected to reduce to the beneficiary’s marginal rate from April 2016).
If you die before age 75 income tax could be deducted by the provider for certain payments relating to defined contribution or defined benefit schemes.
What if I need further information?
Since 6 April 2015, everyone with an uncrystallised defined benefit pension is entitled to free guidance to discuss the options available to them at their scheduled retirement date.
This guidance is just a start, as it isn’t advice that is specific to your particular circumstances, which you might need as well.
What is a Self Invested Personal Pension?
A Self Invested Personal Pension (SIPP) is a retirement savings account for experienced investors who want to manage some or all of their pension investments. With a SIPP, you’re in control and you decide when and how you pay money in, how that money is invested and how you take the benefits.
Managing your pension isn't right for everyone; you need skill and experience to make decisions that meet your objectives and plans for retirement. The value of the investments you have in your pension arrangements can fall as well as rise. If you're unsure about SIPPs or specific investments, please seek independent advice.
Why consider a Barclays Stockbrokers SIPP?
- Maintain maximum flexibility to invest your pension savings as you want
- Choose from a full range of funds as well as ETFs, shares and gilts & bonds
- Choose how to draw your pension benefits through Flexi-Access Drawdown or via Uncrystallised Fund Pensions Lump Sum
- You can draw your tax-free lump sum but you don’t have to take an income if you don’t need to.
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