new pension rules 2015

Understanding the New Pension Rules – and Making Them Work for You

new pension rules 2015

Every so often when you just think that you have your retirement sorted, you’re given a curve-ball – something that unsettles your planning and gives you something else to think about and yet more decisions to make. That curve-ball has just been arrived in the world of retirement savings with new legislation allowing you to have more control over your money.

But with more control comes more responsibility to make sure that your hard-saved retirement fund works well for you. So what do the new pension rules look like, and what options do you have available?

 

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Taking a lump sum

You’re now allowed to take your retirement fund in a lump sum. There are a number of benefits to this – you could pay off your home, buy a new car or go on that long-awaited world cruise. However you also need to consider what taking this lump sum will mean to your finances and the rest of your retirement. By taking your retirement fund out in a lump sum, you’re actually liable for tax. The first 25% is usually tax-free but the remainder is not. So imagine if you’ve got £100,000 in your retirement fund. You get $25,000 of this tax free but the remaining £75,000 could then be subject to 40% tax*. This means that you could actually pay over £21,000 in income tax. Suddenly taking your retirement fund in a lump sum doesn’t look as promising, especially for those with a lot more than £100,000.

Taking it in small bits

Another option is to take your retirement fund out in smaller lumps. This is known as drawdown and allows you to spread your drawings over a greater period of time. With clever planning, savvy individuals will only drawdown enough to stay below the 40% tax threshold. However one of the draw-backs to this is that you don’t get the 25% tax free lump sum so in one go, but in dribs and drabs instead. This makes it much more difficult to splash out on those exciting holidays and other expenses that you’ve been looking forward to in retirement.

Putting it into an annuity

There is, however a third option for your retirement fund. You can choose to give your money to an insurance company and receive it as an annuity.  With an annuity you receive a regular income, paid yearly until the day you die. In our example of $100,00, this means that you take the £25,000 tax free lump sum and then swap the remaining £75,000 for a basic ‘single life’ annuity. The income effectively dies the day you do but in the meantime, you receive a regular fixed income.
Planning early for retirement is a must but planning what to do with your retirement fund after you retirement is vital too, enabling you to live the life you want on the money you have. There are plenty of independent tools you can use to take some more control over your individual situation, such as the retirement planning checklists from the Money Advice Service, and calculators and pension coaching available from Retiready. You’ll also want to ensure you stay up to date on how the government rules and regulations could affect you over the next few years and on into your (hopefully fruitful) retirement.

 

*These figures represent a hypothetical situation. Actual retirement savings and tax rates are subject to your financial service provider contracts and UK law.

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