The recent Budget announced the biggest shake-up to retirement planning in living memory – new pension rules. However, to appreciate the scale of change, it’s useful to understand the current rules (which were tweaked on 27 March 2014).
At the moment, you can take up to 25% of your pension pot tax-free and you then have four options available for the remainder.
- If you are aged 60 or over and have overall pension savings of less than £30,000 you can take it all in one lump – this is called trivial commutation.
- Buy an annuity – an insurance product where a fixed sum of money is paid to you for the rest of your life.
- Capped drawdown – leave your fund invested and withdraw an income each year of up to 150% of what you would get from an equivalent annuity.
- Flexible drawdown – leave your fund invested and withdraw as much income as you want, but you must already have a guaranteed pension income of more than £12,000 per year.
From April 2015 (when the new pension rules take effect), it is proposed that you will be able to take as much or as little as you want from your fund from the age of 55. 25% of the fund will still be tax-free with the remainder being subject to Income Tax.
In other words, there will be much more flexibility – people who want the security of an annuity will still be able to buy one and those who want to keep their pension fund invested can withdraw whatever they see fit.
The freedom and choice of the new pension rules also bring new responsibilities. The removal of the psychological barrier that pension pots are locked away will naturally bring temptation for savers to dip into them too deeply, too soon. However, the fundamental principles of planning for life after work remain the same.
- Save enough – retirement savings have to last a long time – this takes more money than most people think.
- Manage income – income must be taken sustainably – taking too much, too soon, will end in tears.
- Invest appropriately – investment requires a long term approach in order to support a sustainable income.
In summary, the new pension rules offer more flexibility, but investment objectives and careful planning must remain the same to achieve the required standard of living in retirement.
Have your retirement plans changed because of the new pension rules? Visit heartwoodseniors.com for more info.