Your options under the 2015 pension changes

There’s been a lot of media coverage about pensions since changes to the rules were announced in March 2014. Further changes have been announced since then and, whether you are planning for retirement or ready to take your pension benefits, you may want more information about how these could affect you.

More choice around how you can draw your benefits from some pension schemes means you'll need to weigh the options carefully to make sure you have the right arrangements in place. The government has recently launched Pension Wise to provide guidance on the pension choices available.

More ways to access an existing Defined Contribution pension

In the past, from age 55, individuals could draw up to 25% of a pension fund as a tax-free lump sum, and the remainder had to be used to provide a taxable income. For most people this meant using up a Defined Contribution pension fund (where you build up a pot to provide your benefits) to buy a secure income for life, usually in the form of an annuity.

Now, from age 55, individuals can choose how they draw their Defined Contribution pension. Options might include:

  • Taking a lump sum – usually 25% of a pension fund can still be taken tax free –
    this can now be all at once, or in stages if your scheme offers this option

  • The remainder can be taken as taxable lump sums or income. Income tax will be payable on any amount drawn in the year it is taken, so that total tax payable will depend on total income drawn in that year; higher rate or even additional rate tax could be payable

  • Unused pension funds can be left to nominated beneficiaries. (If you die after age 75, taxes may apply, depending on how your beneficiaries draw the benefits.)

Other key pension reforms:

  • There is a new State Pension for those reaching State Pension Age on or after 6 April 2016

  • The minimum pension age (currently 55) will now be linked to State Pension Age, and will increase to 57 from 2028 (when State Pension Age will increase to 67) 

  • Most employers now have to automatically enrol their employees in a pension scheme and make employer contributions

Getting the best out of your pension

Although the restrictions have changed, pension providers aren't obliged to change their current offering under the new laws.

Check what options and benefits your provider offers; there may be guaranteed features and benefits which are worth staying for. On the other hand, it could be that you need to move your fund or leave your existing scheme to find the right solution for you. Bear in mind though, that there may be exit fees and set up charges to pay.

Keeping your pension tax-efficient

Within the allowances, pensions continue to be a tax-efficient investment. Typically, for each contribution you make into a pension, your scheme can claim basic rate tax relief, and this is added to your pension fund. This means if you pay in £80, it can be boosted to £100 actually invested.

If you pay Higher or Additional rate tax, then you can show your pension contributions on your self-assessment tax return, to potentially claim back tax.

If you are employed, your employer may offer a pension scheme where you pay contributions before tax is calculated and your employer may also contribute to your pension. This way of contributing, known as 'salary sacrifice' may be able to offer you a way to save both National Insurance and Income Tax. Check your options with your employer.

All contributions into pensions are subject to allowances:

  • Annual Allowances which apply to contributions in each tax year and vary according to your circumstances (can be between £10,000 and £40,000 or more) 
  • A Lifetime Allowance (reduced to £1 million in 2016/2017), which restricts overall tax relief on the overall pensions built up over your lifetime. 

For more information about the allowance and protection from the reductions visit https://www.gov.uk/tax-on-your-private-pension. By keeping within the Annual and Lifetime Allowances, you can still potentially invest large amounts tax-efficiently.

Useful links to free & impartial advice:

Pension Wise has recently been launched by the government to provide guidance on pension choices at retirement

The Money Advice Service can also help with understanding the options and lets you calculate your likely State Pension age

A new State Pension will be payable for those reaching State Pension Age on or after 6 April 2016

The existing State Pension and additional State Pension

The Department for Work and Pensions offers a Pension Tracing Serviceto help find all the pensions you have saved into over the years

About workplace pensions

Making the right decisions

With most of us living much longer than in the past, our pension funds and other assets may have to last a long time. It’s vital to have all the information you need to ensure you make the right decisions about your future.

To see how Nationwide could help you prepare for retirement, make an appointment to see one of our team of Financial Planning Managers. They will take the time to understand your financial situation, then give you clear, straightforward advice.

Or, if you are ready to take your pension benefits now, then the new Pension Wise service has been set up by the government to help you.