Pensions freedom has given pensioners the option of what to do with their cash when they come to retirement. They presently have a number of options such as putting it into an annuity or taking out lump sums.
When the act was introduced by then Chancellor George Osborne in April 2015, it changed how pensions could be withdrawn.
The aim was to ensure that people withdrawing on their pension didn’t struggle to make bills, even though potentially having a large lump sum locked away. Since being introduced by all references (mainly HMRC) it was deemed a success with significantly more people making use of the pension freedom act.
Although, to make the best options you do need to be informed and how it can work for you.
What can I do?
Pension freedoms boil down into a few simple options:
| Freedom | One-off income | Regular income | Guaranteed income | Can you run out of cash? |
| Buy an annuity | No | Yes | Yes | No |
| Flexible drawdown | No | Yes | No | Yes |
| Cash in the whole fund | Yes | No | No | Yes |
| Take cash when you want | No | Yes | No | Yes |
What age can I withdraw my pension?
This is not changed any of the legislation on when you can withdraw you still need to be 55 and can still take your 25% tax-free lump sum regardless of the option you choose.
Can I do a number of options?
You can pick a number of options for your pension such as taking a lump sum and putting the rest for a regular income.
Do all schemes offer these options?
Defined contribution pensions do. However, not all workplace schemes do so it would be worth checking for your individual circumstances. Also, QROPs if you have transferred your pension it will vary on what options depending on the scheme.
Options review
1) Annuity
This was the go-to option before the pension freedoms came in although now, with low-interest rates, the high cost and other options the annuity seem to be less favourable.
Annuities, do however offer a guaranteed income that usually increases with CPI inflation or at least factor in the increasing cost of living into the annuity, ‘
The advantages, are that you will not run out of money. Cons, that you can get a lot higher potential rates through investing in bonds and less fees.
2) Drawing on your pension
This is the most popular way, this way it stays invested in what it was invested in and potentially continues to grow.
You can withdraw on your pension as you want, may that be regular or for one time purchases. One, of the cons with this, is that you can run out of your pension pot this is why it is most suitable for those with other sources of income
3) Cashing all your pension in
This should only be done if you are aware of the tax implantations, as you only get 25% tax-free, the rest will be subject to income tax at the higher rate. This is why it is best to consult a specialist if you are looking to do this.
4) Taking regular payments
This is taking a set amount each month or irregular payments such as taking different amounts each month. With this, you still have 25% tax-free.
Tax implantations for pensioners
Pensions are taxed as payroll, this means that what you take out over the 25% tax-free it is taxed at the higher rate. I.E you take out £20,000 it is taxed at the £120,000 rate. Pensioners can be caught out and overpay on their pensions due to the system and the way HMRC treats pension withdrawals.
Death and Pensions
I have written a whole blog on death and pensions. Ultimately, it depends on when you die and the type of pension.
Defined contribution pension, if you die under 75 the beneficiaries inherit the pension tax-free. If you are older than 75 then you are subject to income tax. If you had a single annuity the annuity stops and in a joint annuity the surviving spouse can continue to receive monthly payments.
Defined benefit pension depends on the scheme as some schemes might have certain stipulations. Although, in most cases, you will not be able to pass the pension pot on to the beneficiaries.
Can I keep contributing to my pension?
Once you withdraw from your pension the Money Purchase Annual Allowance comes into effect.
This limits what you can put into your pension to £4000 a year. To get the tax benefits, it must be below the present lifetime allowance that is £1,073,100 and it goes up with inflation (although presently frozen till 2025). Any savings over this amount is also taxed.
What does the future hold?
As with the state pension, the private pension age is going to increase, the age is going up from 55 to 57 years old in 2028.
How does this affect me?
This age rise is affecting people born after January 1, 1971. So, those born, in the early part of the year will have to delay the pension plans by two years.
FAQs
What is pension freedom?
Pension freedom is an act that allows pensioners with a private pension pot over the age of 55 to take 25% tax-free and the rest how they desire.
Is the pension freedom subject to all pensions?
No. It is mostly (but not all cases) for personal pensions, SIPPs, workplaces pensions, defined benefit pensions.
Can I withdraw all my money in one go?
Yes, you can at 55, but as stated earlier this would be subject to 75% of the pension to tax. You should consult an expert before making any decisions as this could push your tax bracket up higher which is not what you want as you are looking to retire.
How do I take my money?
You will need to talk to the provider or IFA you will usually have to fill a withdrawal form provided by the provider and then transfer the money.
Can I take my pension before 55 without getting taxed?
In some extreme circumstances such as being terminally ill, but other than that it is not eligible to withdraw before 55 tax-free.
