In April 2015 the government introduced the most significant pension reforms for a generation.
The reforms give people who’ve worked and saved hard greater flexibility over how and when they access their pension savings and mean anyone reaching retirement age has been able to withdraw some, or all, of their pension (subject to tax on everything above the first 25% they take out).
Lamborghini sales unaffected
A year on and figures suggest over 230,000 people have accessed more than £4.3 billion from pension funds. The average withdrawal is £18,750 – laying to rest the fear that retirees would be tempted to ‘blow their entire pension pot on a Lamborghini’. In fact, with 516,000 payments made, it goes to show many people have chosen to take their money in instalments, rather than everything in one go.
The figures also showed:
• the highest number of partial withdrawals were made by consumers aged 55-59
• consumers with bigger pension funds were more likely to have taken financial advice
• around 60% of drawdown and annuity customers stayed with their existing provider
Making the right decision
The age at which you can draw your pension is currently 55, but this is set to increase to 57 from 2028 and, from then, in line with the rise in the State Pension age, albeit remaining 10 years below.
From 6 April 2015 those aged 55 or in a defined contribution pension plan are able to access pension savings in a number of different ways:
• buying an annuity
• Flexi Access Drawdown – previously known as flexible drawdown
• uncrystallised Funds Pension Lump Sum (UFPLS) – this allows you to draw money directly from your pension fund. Of each payment you withdraw, 25% is tax-free and the other 75% is taxed as income via PAYE
It’s also important to consider not only your pension savings – including the state pensions – but also any other savings and investments you may have. And if you choose to continue to invest amounts that you don’t need to access immediately, you should think about:
• your current essential income needs such as your day-to-day living expenses and other known or planned expenditure
• your current health status
• your lifestyle and the ‘non-essential’ expenditure, such as holidays, new cars, sports and hobbies, entertainment etc
• future possible/anticipated living expenses incorporating, possibly, a budget for care
• unexpected expenses such as car repairs, home maintenance and health problems
• gifts – either now or in the future
• the extent to which you’d like to leave an inheritance for your family and dependants
With choice comes complexity, so it's important to take advice before making decisions on your pension.
Contains public sector information licensed under the Open Government Licence v3.0. HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
If you’re looking to access your pension savings or you’d like advice on your pension choices, please get in touch.