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Pension Flexibility – ‘Use them like a bank account’

Changes introduced from 6 April 2015 allow people to access their pension savings more freely and easily than before. If you would like more information on the main changes, ask Tax Help for Older People for their guide which aims to help you understand the tax treatment of the options available within the new, more flexible, regime.

The rules are complex, but we thought you might find it useful to understand these key points:

Pension flexibility came in from 6 April 2015

  • If you are over 55 and have a ‘defined contribution’ or ‘money purchase’ pension, your pension provider might allow you to take what you like, when you like, from your pension

The three main choices available will be:

  • To withdraw all of the money in one go
  • Leave it in the scheme and take a regular or occasional income
  • Buy an annuity or enter into a ‘drawdown’ arrangement

or

  • A combination of all three
  • Rules about selling existing annuities do not come in until 6 April 2016

Defined benefit’ or ‘final salary’ pensions will still have stricter rules

  • It is still possible to take money out of defined benefit schemes under the existing trivial commutation rules
  • The taxation of these payments differs from the new flexible rules

There is no rush!

  • Just because the new rules start in April 2015, you do not have to decide now
  • Consider everything – your circumstances (personal and financial), investment choices, future plans and, importantly, tax consequences

Know the tax consequences of your decision

  • You are allowed to take some money out of your pension tax free
  • But plan ahead. Three-quarters (75%) of your pension savings will count as taxable income and will be added to your other income, which may give you an extra tax bill

Understand the tax ‘paper trail’

  • Money from pensions will be taxed under the Pay As You Earn (PAYE) system
  • You might not pay the right tax at the right time and may need to claim a tax refund or pay some more tax later on
  • If you take all of your money out, you can usually claim back overpaid tax immediately
  • If you leave some money in your pension you might have to wait until the end of the tax year to get your refund or be told you owe tax

Take further advice

  • Use the Government’s guaranteed ‘Pension Wise’ guidance
  • Get specialist advice on your tax position
  • Watch out if you claim tax credits or state benefits – check the effect of your decision on your entitlement
  • Beware, DWP may ask questions if they believe you have impoverished yourself by using or giving away your pension and then later apply for benefits

Some useful contacts

Pension Wise                                              www.pensionwise.gov.uk

The Government’s guidance service. Visit the website for general information on taking money out of a defined contribution pension.

Telephone                                                     030 0330 1001                                                                                                                     between 8am and 10pm, Monday to Sunday

The Pension Advisory Service               www.pensionsadvisoryservice.org.uk

For other pensions help, particularly with defined benefits pensions.

Telephone                                                     0300 123 1047

Money Advice Service                              www.moneyadviceservice.org.uk

Free and impartial money advice, set up by government

Telephone                                                     0300 500 5000

Tax Help for Older People                       www.taxvol.org.uk

This article is by Tax Help for Older People registered charity no 1102276, offering free tax advice to older people on incomes below £20,000 a year. The Helpline number is 0845 601 3321 or geographical 01308 488066.