Pensions freedoms: Do you know your options?
Defined contribution pension freedoms – the legislation is in place but does your pension contract offer you the freedom you need?
It’s approaching 4 years since the pension freedoms were introduced, which meant those entering or planning for retirement no longer needed to buy an annuity. While I imagine we have all read plenty of press coverage on this subject, it’s important to separate the anecdotal from the actual.
What do pension freedoms really mean?
Here’s a brief recap.
Flexible access to your personal pension from the age of 55 allows you the following options to withdraw funds from your pensions:
- 25% of your pension fund can be withdrawn as tax free cash. This can be done in phases or as a one off lump sum.
- The remaining 75% of your fund can be accessed as and when you wish through flexible drawdowns, a complete withdrawal, the purchase of an annuity (the guarantee of a set level of income for life) or a combination of withdrawal styles.
It must be noted that this 75% of your fund will be taxed at your marginal rate of income tax when you withdraw it, so taking the full amount could result in a up to a 45% tax charge for additional rate taxpayers before it reaches their account.
If you are fortunate enough to have a pension which you do not need to access during your life, the funds can remain in the pension untouched and can potentially pass to your nominated beneficiary.
The freedoms also introduced more flexibility in how pensions can be passed to nominated beneficiaries as a pension fund in their name, thus retaining the tax efficient pension wrapper and allowing beneficiaries to access the fund as and when is deemed appropriate, irrespective of the beneficiaries age.
Under the 2015 rules, if the pension holder passes away before the age of 75, and the pension is designated to the beneficiary within two years of death, the beneficiary can draw on the pension without incurring an income tax liability. If the pension holder is older than 75 at the time of death, any withdrawals by the beneficiary are liable to income tax at the beneficiary’s marginal rate of income tax.
These do, indeed, offer a far greater degree of freedom than previously enjoyed but are you sure you are benefiting from the full freedoms available?
Providers of contracts set up prior to 2015 have not been obliged to update their terms to allow for the pension freedoms. Many people approaching retirement age are planning how to access their pension to best suit their lifestyle but are finding their existing pension contracts don’t offer them the flexibility expected – their only option is an annuity. Equally, we have found that a number of pension administrators have not adopted the full death benefit flexibilities, particularly when it comes to passing wealth down the generations. In both of these cases, a transfer to a new pension contract would be required to gain these freedoms and arrange the withdrawal options that suit you.
Consultant, Financial services
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.