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New Pensions Freedom

Posted by siteadmin on Friday 31st of July 2015.

PENSIONS FREEDOM

Although the new Pensions Freedom has been available since April this year, we are finding that many people do not fully appreciate all the flexible benefits that they can enjoy from their pension funds. 
 
Pensions Freedom is probably best summed up by the original Chancellor’s statement. Chancellor George Osborne said people should “be able to access as much or as little of their pension as they want and pass on their hard-earned pensions to their family’s tax free.” People should be “free to choose what they do with their money”. 
 
What does this Pensions Freedom mean in practice? Who qualifies? 
 
The new rules apply to investors aged at least 55 who have a personal or stakeholder pension, a Self-invested personal pension (SIPP), an Additional Voluntary Contributions (AVC) or any other defined contribution pension. The new Pensions Freedoms do not apply to people with Final Salary Pensions or Defined Benefit Schemes. 
 
How to take your 25% tax-free cash
 
Most people can take up to 25% tax-free cash from their pension. You can now decide how you take that tax-free cash: take it all in one go upfront or have a portion of any withdrawals you make tax free. So, someone with a pension worth £100,000 will have the choice of: 
 
1. Taking the £25,000 tax-free cash all at once, with any subsequent withdrawals taxed as income
 
 2. Making a series of withdrawals over time and receiving 25% of each withdrawal tax free. For instance, someone making lump sum withdrawals of £20,000 would receive £5,000 of each withdrawal tax free. Equally, someone taking an income of £1,000 a month would receive £250 of that payment tax free. Please note: this will not be available through an annuity. 
 
3. Using the £25,000 tax free cash element initially as tax free income leaving the balance of the pension fund for future use, which will allow the balance of the fund to grow and increase both your future tax free and taxable incomes. 
 
The second and third options can be attractive because they may help you to manage your tax liability. In addition, whilst your money is in the pension, it can remain invested. Depending upon the growth of your pension fund, you could end up with more money available to withdraw over time. 
 
Already our experience has found that many pension companies are unable to offer the flexibility of options 2 and 3 and in this respect we are able to recommend to our clients, pension plans which offer all 3 options and the maximum flexibility.   
 
Freedom in how you take your pension 
 
You decide how to make withdrawals from your pension:
1. Take the whole fund as cash in one go 
2. Take smaller lump sums, as and when you like 
3. Take a regular income (via income drawdown – where you draw directly from the pension fund, which remains invested – or via an annuity – where you receive a secure income for life) 
 
Please remember though, any withdrawals in excess of the tax-free amount will be taxed at your marginal rate (the highest rate of income tax you pay). 
 
It will be your responsibility to decide how much income to take, bearing in mind the more you take, the greater the risk you will run out of money later in life. We don’t know how long we’ll live, so it’s important to think carefully about how much of your pension you can afford to take out. Investors interested in taking advantage of the new Pensions freedom, but wanting to take only their tax-free cash now and start drawing from their pension later could consider income drawdown now and benefit from extra freedom in the future.
 
Freedom when you pass your pension on 
 
Until now there was little incentive to preserve a pension fund, because on death it could be subject to a punitive 55% pension ‘death tax’. The 55% pension ‘death tax’ is now abolished. When you die, any money left in your pension can be passed on to your beneficiaries. They will benefit from the windfall subject to income tax at their marginal rate, tax free or subject to a 45% tax (if you die after age 75 and your beneficiaries take your pension as a lump sum). 
 
What happens if I’m already drawing my pensions? 
 
If you’re currently in income drawdown, you should be able to benefit from the new rules. If you’ve used the whole of your pension to buy an annuity, it’s unlikely you’ll be affected by the changes. 
 
Investing 
 
The new flexibility is making pensions extremely attractive. You can build up your pension fund, knowing that from age 55 you can not only draw on your pension fund without the any restrictions, but also pass on any unused pension fund remaining, to beneficiaries’ tax-efficiently on death. However, with the freedom comes the responsibility of managing your pension responsibly. 
 
For more information and advice on the new Pensions Freedom, or other investments and savings, contact us either via our website www.angloifa.com or freefone 0800 193 1066.

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