Pension freedoms: an overview

Lauren Morton | 18/01/2019



Changes to the pension system in 2015 have given us much greater flexibility and control over how we access our retirement savings. Here, we explain what pension freedoms are, and the options you have at retirement.

The background

Prior to the introduction of pension freedoms, most people with defined contribution pensions used their pension savings to buy an annuity which would guarantee an income for the rest of their lives.

The aim of the 2015 pensions shake-up was to give people more choice over what they could do with their pensions at retirement.

Pension freedoms only apply to defined contribution pensions, otherwise known as money purchase pensions. With this type of scheme, the amount you get at retirement depends on how much you and your employer have paid in (if it’s a company scheme), and investment returns.

Freedom and choice

Pension freedoms allow you to take your whole pension out once you reach the age of 55 (the government is planning to increase this to 57 from 2028) if you want to. If you did this, you’d pay no tax on the first 25% of this money, and the remainder would be subject to tax.

However, the big risk of doing this is that you end up spending your pension too soon, and that you end up with a hefty tax bill because taking out a big lump sum pushes you into a higher tax bracket. It may also affect any means-tested benefits you receive.

Find out more about tax and pensions.

If you don’t want to take all of your money out at once, pension freedoms mean there are other ways to use your pension to provide you with an income.

Other ways to take cash from your pension

There are several different options to choose from when deciding how to take money from your pension.

• Option one: Take the first 25% of your pension tax-free and then use the remainder to provide you with a flexible income. This option allows you to keep your pension invested, and to take an income when you need to. • Option two: Leave your pension invested and withdraw money as and when you need to. When you take out money from your pension, the first 25% of each withdrawal is tax-free and the rest is subject to tax. • Option three: Take 25% of your pension tax-free and use the remainder to buy an annuity.

You can use a combination of these options if you want to. So, for example, you might decide to buy an annuity with some of your pension, and then leave the rest invested so you can top up your income as and when you need to. The right option for you will depend on your individual circumstances, so if you’re not sure how to proceed, seek professional financial advice.

If you’re aged 50 or over, you can find out more about your options at retirement from the Government’s Pension Wise service.

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

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