Changes to pensions

Saving moneyMajor changes to pensions are being introduced in April, so if you are over the age of 55 it is worth being aware of your options.

Under the current rules, when you access a personal pension you can normally take 25% of your pension pot as a tax free lump sum. The remaining 75% must be used to provide an income, designed to last for the rest of your life. There are two main ways to do this – buy an annuity or set up pension drawdown.

An annuity will provide a guaranteed income for life, which may suit some people who need to know their bills will be covered. The disadvantage of annuities is that they are very inflexible, and cannot be changed once they are set up, even if your circumstances change. Annuity rates are also currently quite poor as they are determined by interest rates, as well as life expectancy.

Pension drawdown allows you to keep your money invested, and draw an income as you need it. Under the current rules, the amount you can take each year is restricted, and any money left behind after you die can be taxed very heavily.

The new rules mean that everyone will be entitled to pension drawdown with no restriction – so you can withdraw your whole pension pot as a lump sum if you want. 75% will usually still be taxable, so if you do take the whole pension pot you could end up paying higher levels of tax, as well as potentially losing out on means-tested benefits.

The other danger is that pensions are intended to provide an income for your whole retirement, so you could run out of money if you take too much out or the money is not invested carefully.

There are lots of benefits to the new rules, in terms of flexibility and allowing people to spend their own money as they see fit. There are also lots of potential pitfalls, in terms of tax and investment risk. Be aware that not all pension companies will be able to offer full flexibility and they are not allowed to give advice, only information.

It is also possible to transfer a final salary pension into a personal pension to take advantage of the new rules. This means giving up a guaranteed pension, but there can be circumstances where having access to the money makes this worthwhile.

The value of your investment can go down as well as up and you may not get back as much as you originally invested.

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