Pension savers will have the option to gain immediate access to their whole savings pot at non-punitive rates from the age of 55, under a massive overhaul to the pensions system to come into force next year.
The changes, which will take effect from April 2015, mean it will be easier and cheaper for most people who've got a pension to draw cash from their pot. The new rules do not apply to final salary pensions, where your retirement income is based on your final salary at the company that provides it, and your length of service.
Here is what is happening:
- At present you can take 25% of your pension tax-free. If you want to take out more the rules are complicated, but if you stick within the limits you are charged tax at your income tax rate. Anything above the allowed limits, and you're stung by a 55% tax charge. But remember, it's not necessarily the best option to draw the cash in one go in case you run out.
- Under the new rules, you can still take 25% of your pot as a tax-free lump sum, but anything above will be taxed as regular income NOT at 55%. So if you're a basic-rate taxpayer, you'll pay 20% tax.
- Under current rules, many feel like they have no choice but to use their pension to buy an annuity, which gives you an income for the rest of your life in return for your pension pot. Under new rules, pensioners will have another alternative to annuities.
To help decide what's best for you, the Government has also announced everyone with a pension will be offered free face-to-face guidance.
And if you still prefer to take an annuity, you can still do so.