Pensions just got a lot more interesting

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    You can’t get away from the news about pensions – people can take them from 55, spend the money as they wish, buy a sports car if they like. Surely there’s a catch? This is what you need to know…and it’s particularly important for women to get to grips with the changes, because we tend to have less in our pensions and are set to retire later, so we need to do more to get our retirement planning right.

    You can take your pension in cash. Or you can keep things flexible and take your 25% tax free cash, and take further (taxable) withdrawals out as and when you want. Or you can buy a fixed income called an annuity, which isn’t flexible but does guarantee you an income for life. Or you can mix and match some of these options!

    Who benefits?

    Those with defined contribution pensions – for example personal pensions, stakeholders, SIPPS and many employer schemes that pay a pension based on what you pay in, not on your salary and length of service

    Who has to think twice?

    Those in final salary pension schemes – with your pension based on years of service and your earnings at or near retirement, because the pension is so generous it is usually worth keeping. However, if you want to leave your unused pension fund to your dependants, it can still be worth transferring it to a more flexible type of pension to take advantage of the new pension freedoms. You will be required to get financial advice before making your decision as there’s a lot to weigh up when you’re giving up a guaranteed income.

    Who does not?

    A number of civil service pension schemes have been barred from cashing in their pots under the reforms because these are “unfunded”, with the pension paid from taxpayer’s pockets.

    Everyone over the age of 55 who wants to take part in the new pension freedoms will be given a free half-hour session of guidance through Pension Wise – either provided face-to-face by Citizens Advice or over the phone by The Pensions Advisory Service.

    How do I get help?

    Call 030 0330 1001 to book a session.

    Is it worth it?

    Yes – to get a good understanding of the options available to you. However, this is more guidance than full independent financial advice – for that you will need to pay. Go to for a list of advisers near you.

    You can pass on your pension – often tax free. Under the old annuity system, your pension often died with you.

    Who benefits? Those with defined contribution pensions (the ones that pay out depending on what you pay in – including personal pensions and many employer schemes). They can pass on unused money in their pension pot to a nominated beneficiary. Instead of a 55% tax charge (under the old rules) there is no tax if the individual dies before aged 75. If you die on or after age 75, the beneficiary pays income tax on what they take out of the pension, which could be 0%, 20%, 40% or 45%. If the fund is taken as a lump sum, then 45% tax could be deducted, although from April 2016, this could reduce.

    There is a new cap on contributions – the maximum lifetime allowance is now £1million. More than this in your pension and you will face a tax charge of 55%. The annual allowance is £40,000 but once you take more than the 25% tax free cash from your pension (from age 55) you are limited to investing £10,000 a year.

    What does this mean? You can continue to get a tax relief top-up on what you pay in to your pension – so can still benefit from the generous tax breaks – even if you’ve taken a 25% tax free lump sum. So you can spend some money now if you are 55 or over (for example, to pay off a mortgage or help your kids onto the property ladder) and still invest for your long-term needs.

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