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What are the new April 2015 pension changes?


You may have recently heard about the new pension reforms coming into place in April. In the 2014 Budget, the Chancellor of the Exchequer, George Osborne, announced the biggest pension overhaul in over a decade. The idea was to create more freedom for savers than there has ever been. Mr Osborne wants people to have the freedom to use their pensions however they choose, with fewer penalties than ever before.

Freedoms and flexibilities

Currently, if a saver over 55 wishes to take all of their money out of their pension in one go, they can take 25% tax free, but would be charged a flat rate of 55% tax on the rest. As of April 2015 this will be changing. If a 55 year old saver would like to take all or some of their money out of their pension, they can, and will receive 25% of it tax free with the remainder charged at their marginal rate of income tax - currently 0%, 20%, 40% or 45%.
These changes mean that savers will be able to access their pension pots via Income Drawdown with much greater flexibility. People will be able to dip into their pensions and make as many withdrawals as they want, each time getting 25 per cent tax-free and the rest taxed as income.

What happened before the changes?

At retirement, traditionally, pension savers purchased an annuity. An annuity is a form of insurance policy typically purchased with a pension fund, which entitles the retiree to receive a guaranteed monthly income, typically until the end of their lifetime.
Annuities have become less popular over recent years due to annuity incomes getting smaller and an increased range of retirement options now being available, such as income drawdown. This fall in annuity sales has accelerated following the 2014 Budget announcement, as an increasing number of people prefer the flexibility that income drawdown offers.
Annuities are still available to buy, and can still sometimes be a better option, depending on things like an individual’s health and attitude to risk. The thing to remember with income drawdown is that there is a risk of overspending and leaving less and less money to live on in older age. An annuity does not carry that risk as it is a guaranteed income until the end of a person’s lifetime.

What will happen now?

It is likely that annuity sales will continue to fall, as more people opt for the freedoms available with income drawdown. There are concerns that savers may overspend their pensions and be left with little or no money in their later years, however the Chancellor has said that he believes people can and should be trusted to use their money responsibly, and therefore have the freedom to use it whenever, and on whatever they see fit.

What help is out there?

The Government has launched a new ‘Pension Wise’ guidance service in partnership with the Citizens Advice Bureau, which aims to offer face to face, impartial, free guidance on the various new options people have available to them. A website also has been created, which aims to help people who do not want to, or cannot receive guidance face to face. The ‘Pension Wise’ website focuses on six steps users should take in deciding how to turn their pension pot into retirement income.
There have been fears in the industry that this service will be ignored, previous free pension guidance services offered by Royal London and Legal & General in 2014 both had an extremely small take-up rate.
If you are nearing retirement age and would like some further information about the options available to you, you can visit the ‘Pension Wise’ website. If you would like regulated financial advice in regards to your pension, our in-house financial advisers will be happy to speak to you over the phone, face to face, or via our online question service.

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