Pensions Changes In 2015
From April 2015, ‘Freedom and Choice’ legislation completely changes how retirees can structure their retirement income, removing the requirement to buy an annuity to provide retirement income. The new choices for accessing pension funds are to take:
- The entire fund as cash in one lump sum - 25% Tax Free and the remainder taxed as income
- Smaller lump sums drawn down as required, with 25% of each withdrawal tax free and the rest taxed as income
- 25% of the fund tax free and then withdraw a regular taxable income via a ‘traditional’ annuity or ‘drawdown’ pension
- Up to 25% tax free and no further income, leaving the balance of the fund invested for the future
Given the choices an employee must now make at retirement, the UK Government is launching ‘Pension Wise’, a service to provide guidance to retirees. As a minimum, employers must signpost their employees to this service so it is now necessary to review your pension scheme communications to ensure they are compliant.
Many retirees will not be able to make a decision based on Pension Wise guidance alone, and a lack of financial planning could mean paying higher rates of Income Tax or running out of income in retirement.
Trustees of occupational defined contribution pension schemes must also consider whether or not to open their pension schemes to the new freedoms, carefully considering the effect any large-scale cash withdrawals could have on the scheme and its investment strategy.