From 6 April 2015 the Government is changing the rules around so-called ‘pension freedoms’. This means over 55s will be able to access their entire pension savings before they retire. This is said to affect around 13 million pension savers in the UK.
If employees do opt to receive their pension early, the first 25% of their withdrawal will be tax-free. The rest will be taxed at 20%, not 50% as it currently stands. The rules are anticipated to see the biggest increase in pension drawings amongst savers with pension pots under £30,000. This is because drawings above this figure could push savers into the upper-income tax band currently at 40%.
Since people will be able to draw funds from their pension with the first 25% being tax-free as often as they please, the need to opt for an annuity will dramatically be reduced.
Employees with less than £10,000 in their pension pots will additionally be allowed to withdraw the whole amount in one lump sum with the first 25% being tax-free. Under the current rules this was only available to people with pension pots under £2000.
These changes will not apply to ‘final salary’ pensions where employees gain a guaranteed income after retirement. The changes will apply to ‘money purchase pensions’ and ‘defined contribution pensions’.
Analysts are worried employees will release too much of their pension so they run out of funds before they die.
The Government will be investing £20 million into advice centres to provide free and impartial advice to those contemplating dipping into their pensions. Investment will be awarded to the Citizens Advice Bureau and the Pensions Advisory Service.
There is also expected to be an increase in the number of ‘pension liberation scams’ like this one.