Whether you are saving for your retirement, or about to retire, the changes announced in the 2014 Budget will give you more freedom, choice and flexibility than ever before over how you access your pension savings.
PENSION FREEDOM IS HERE: The power to do what you like with the money you’ve saved for your retirement – no laws forcing you to buy an annuity and no government telling you what you can and can’t do with your hard-earned cash.
If you want to blow the lot on a sports car, the pension’s minister is quoted as saying, “you’re more than welcome”.
- From age 55 you will have a range of options about how to use your pension if it’s the type of pension where you save into your own pot. These options don’t apply if you have a fixed income pension linked to years of service.
- There is no rule that says you must take money out of your pension from age 55. Many people keep working into their 60’s which gives you more time to save and a decade or more of potential extra growth.
- There are 3 main options for how to take money out of your pension. You can take flexible income, fixed income or take the whole thing as a cash lump sum. With all options 25% can be a tax free lump sum with the remaining taxed as income. This means you could pay zero, 20%, 40% or 45% tax on what you take out of your pension.
So, if you do use your pension to buy a Lamborghini, you’ll pay enough tax to buy the Treasury a Porsche.
- If you choose flexible income, known as Drawdown, you stay invested and take your money out gradually. You can change the amount you take out and if you die before spending all of it, your pension savings can pass on to your loved ones.
- The second option is a fixed income called an Annuity. There is no flexibility but the peace of mind of a guaranteed income will suit some people and if you start with a flexible income you can move to a fixed income later.
- The third option is taking your whole income as a cash lump sum, but don’t sleepwalk into a tax bill as you could pay as much as 45% tax and don’t fall into the hands of scammers who might cold call you tempting you to cash in your pension and invest in something with suspiciously high returns. Be on your guard against fraudsters.
- You might inherit more from a loved one’s pension. That’s because the pension death tax of 55% is being scrapped. If someone dies before age 75, with some types of pension, it will be passed on tax free and if someone dies after age 75, if you inherit a pension pot from them, it is your income tax rate which applies to whatever money you decide to take out of that pension pot.
For impartial advice and guidance from your local Trading Standards Approved Independent Financial Adviser Firm, call Savvy Financial Planning on 0845 680 8910.