Changes To UK Pensions Rules Start April 2015.
The Chancellor of the Exchequer George Osborne announced earlier this month that the government was introducing new Pensions rules from next April 2015. The new pension rules will allow pension holders over the age of 55 next April (2015) to use their pension pot like a bank account. My understanding is that pension holders will have total control over their pension money and will be able to dip into their pension pot as they like and withdraw any amount of money available within the account. The first 25% of any money withdrawn will be Free of income tax and the remaining 75% will be payable at the policy holders marginal rate of income tax.
The Government believes that people should have the freedom and be trusted to manage their own pension pots. They further believe that the new pension rules will encourage more people to save money for their retirement as they will have total control over how they spend their pension money in retirement.
Furthermore, pension holders will be able to leave their pension funds as part of their estate on their death free of Inheritance Tax. By not having your pension pot taxed at death means that you can protect your capital for your family free of inheritance tax This is not possible with an annuity.
In light of the new pension rules many financial pundit and skeptics are fearful that pension holders will not have the skills and knowledge necessary to manage their pension funds in order to get the best return on their money. My advice to anyone with a pension fund irrespective of the amount of money in their fund; is that they should take appropriate financial advice from a pension expert as soon as possible to protect and grow your investment and their future income. The release of the new pension rule is great news for all savers who generally save money for their old age.
Another disadvantage being discussed by the skeptics under the new pension rules is the belief that people will spend their pension on fast cars, drink and luxury holidays before throwing themselves on the mercy of the state to support them in their old age. Fortunately, the Government does not believe this will happen as they believe that pension holders will possible have a fear of losing their nest egg and financial control and will actually look after their pension pots for their old age. There are cynics everywhere and only time will tell who was right and who was wrong.
It is important to update your last ‘Will and Testament’ as it’s now possible that you will be leaving the residual of your pension fund to your nearest and dearest when you die, free of inheritance tax. These new pension rules I believe are long over due.
Pitfalls of the Pension Annuity
For those who are wondering what an annuity is; well it is a guaranteed contract generally bought from an insurance company that will pay you an income for your remainder of your life when you retire. For example if you had a pension pot of £100,000 when you reached age 65; it would buy you an income of around £6,000 pa for the rest of your life.
If you have any health impairment or you are a smoker then you will receive slightly more money. The reason for this is the annuity firm believes you will die earlier than a health person who has never smoked or suffering from an illness. In the past most people have been reluctant to shop around for the best annuity deals and hence they have ended up with a poor annuity income. Annuity Incomes are normally around 5% of the total sum paid unless there are more serious health issues.
The Latest Pension Rules Put The Control Back In Your Hands
Under the old pension rules anyone with a pension pot was forced to take their pension funds and either buy an annuity to provide an income for the rest of their lives when they reached the age of 65 or they could use the capital in their pension fund as a draw-down facility.
At the time of retirement a pension holder was allowed to withdraw 25% of their pension pot as a tax-free amount. This money was theirs to spend as they wished. Some people opted to wait longer before buying a pension as the older the pension holder was the more money they were offered by the annuity firm. The old pension rules were restrictive and you were never in charge of your own money. Many people felt limited in how they managed their pension funds in retirement.
In recent years annuity incomes have been dropping as interest rates have fallen over the past decade. Pensioners have seen the annuity income fall on the annuity markets in recent years. Once you have bought an annuity income you cannot change your mind.
If you bought an annuity say this year and died a year later, then the annuity firm would provide your spouse with half your annuity income until he or she died and then the income would stop. This has been one of the biggest disadvantages with annuity products. It has probably been responsible for many people deciding that saving for a pension was a waste of money. The reality of annuities is that you could invest in an annuity today and you and your partner could die in a traffic accident a month later and the £100,000 you invested would be gone.
One of the great advantages of an annuity is that the longer you live the more you benefit from your annuity income.
It is my understanding from the information released so far is that government, teachers and NHS employee pensions are not included in these new pension rules.
New Pension Rules Means:
You should seek advice from a qualified pension adviser, to discuss the new pension rules and make sure you have a pension review so you can decide on a pension plan that suits your needs in retirement.