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Everything you need to know about the pensions reforms

Tuesday, February 10, 2015

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Whether you're aware of it or not, pensions are changing. From April 2015, you'll have a lot more freedom with your pensions following the reforms that were proposed in the March 2014 budget.

Whereas previous alterations to pensions were quite small, the latest reforms are resulting in some significant alterations. In fact, George Osborne, chancellor of the exchequer, announced the biggest changes to pensions in almost 100 years in his Budget speech.

It’s important that you have the entire information going forward in order to be aware of what your rights are and what can happen with your money.

Here's everything you need to know about the reforms and the effect they will have on current and future pensions.

More freedom and flexibility

One of the biggest changes being made to pensions is the ways in which you can access your money. In a bid to make pensions more flexible, you will be able to drawdown your pension over time, buy an annuity or draw out everything in a lump sum.

Anyone over the age of 55 will have full access to their pension pot, allowing them to withdraw money in lump sums. This removes the need to buy an annuity to provide you with regular income.

From April 2015, withdrawals from a defined contribution pension after retirement will be taxed as income. This means that rather than being taxed 55 per cent for a full withdrawal, the amount you're taxed will depend on how much income you have received throughout the rest of the financial year.

This could mean you have access to more of your pension, leaving you in a stronger financial position.

Tax-free pensions

The previous rule that allowed the majority of savers to access 25 per cent of their pension in one lump sum completely tax free still applies. This means you can still withdraw a quarter of your pension pot in one go without having to pay out to the taxman.

Greater access

The government had previously stated that the changes will only come into force for those with defined contribution pensions. These are the pensions that see both you and your employer pay into your pension, which is then invested by a pension provider. When you retire, the amount in your pension depends on the amount paid in as well as the success of the investment.

However, it has now been announced that people with a defined benefit scheme stand to benefit from the reforms too.

Most of the time defined benefit pensions are linked directly to your salary, meaning they are basically a promise that you’ll get a certain level of pension once you retire. Those with this type of pension in a funded public sector scheme or in the private sector will be able to transfer to a defined contribution scheme if they currently have a defined benefit pension.

Ultimately this means they’ll be able to benefit from the changes - which opens up pension flexibility to around 18 million people in the UK. However, those that are in unfunded public sector schemes aren't going to be able to transfer.

More guidance

If you're able to benefit from the reforms, you'll also be able to access free pensions guidance. The impartial advice will help you to fully understand what you can do with your pension and allow you to make informed decisions as to what to do with your money.

You'll have access to the advice via the phone, internet or the Citizens Advice Bureau. No matter how you choose to get the advice, no one will try and sell you any products.

Pension’s schemes and providers will also have to tell you about the free information service when they send you information as you are approaching retirement.

Pass it on

Under the old rules, pensions that are passed on by those who die under the age of 75 were subject to pay 55 per cent of the pot in tax. However, those with defined contribution pensions will be able to pass on any unused pension funds as a lump sum completely tax-free if they die under the age of 75.

The reforms also mean that from April 2015, if the original policyholder of certain types of annuities that pay out after death passes away below the age of 75, the payouts will be tax-free. This includes joint life and guaranteed annuities.

Those who die over the age of 75 and still have unspent funds in their defined contribution pensions will be able to pass it on to a beneficiary as one lump sum that will be taxed at 45 per cent, or as income payments, which will be taxed at the normal rate.

What do you need to do?

All these changes come into effect from April 2015, which means that if you’re over 55 you can take advantage of them from then, if your pension’s scheme rules allow.

If you are thinking about retiring soon, you don't need to do anything until then.

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