The most radical changes to pensions in almost a hundred years
In April 2015, the Government introduced the most radical changes to pensions in almost a hundred years. From April last year, individuals from the age of 55 with a defined contribution pension can now access their entire pension flexibly if they wish.
The pension freedoms announced by the Chancellor, George Osborne, in Budget 2014 and introduced on 6 April 2015 mean that instead of being required to buy an annuity with your money purchase pension pot, if you are aged 55 and over you now have more flexibility to take your money how you wish. Generally, 25% of the pot is tax-free, and the remainder is subject to Income Tax at your current rate.
Defined contribution (or money purchase) scheme
A defined contribution (or money purchase) scheme is the most common type of pension. This involves you making regular payments to build up a pot of money. Your payments into the pension pot are enhanced by tax relief at your highest rate of Income Tax. If the scheme is a workplace pension, you may also receive contributions into the pot from your employer. You can also set up a private pension such as a stakeholder pension.
The majority of people at retirement prior to the introduction of pension freedoms had only one realistic option, which was to buy an annuity. Today you have a much greater choice about how you spend your pension – but there are also greater risks involved if you get it wrong.
Make sure your pension savings last
Pension freedom means the responsibility is up to you to make sure your pension savings last as long as you need them to. Typically this could be between 20 and 30 years, or even longer, which is why it is essential to obtain professional financial advice. Retirement has always been one of the biggest financial decisions you will make in your lifetime, and it is now much more complicated.