Pension reforms: 7 things to remember

Following the pension reforms HM Treasury has attempted to clarify some issues

Pension reforms: 7 things to remember

Following the changes in the pension system, announced by Chancellor George Osbourne in his 2014 Budget, investors and savers need remember the following advice from HM Treasury:

1. From April 2015, no matter how much you decide to take out from your pension after retirement, you will be charged the normal rate of income tax you pay on your salary (so either 0%, 20%, 40% or 45%) rather than the previous tax charge of 55% for full withdrawal.

2. 25% of your pension pot will remain completely tax-free, as it was before. You’ll be able to access 25% of your pot in one go without paying any tax.

3. Although HM Treasury previously announced this would apply just to people with ‘defined contribution’ pensions, people who have a ‘defined benefit’ scheme will now benefit too.

A ‘defined contribution’ scheme is a type of pension also known as a ‘money purchase’ scheme. This is when the money you and your employer pay in is invested by a pension provider chosen by your employers. The amount you get when you retire usually depends on how much has been paid in and how well the investment has done.

A ‘defined benefit’ pension is typically a promise of a certain level of pension in retirement which is linked to your salary.

In addition, HM Treasury has announced that people in the private sector or in a funded public sector scheme will still be able to transfer from a defined benefit pension scheme to a defined contribution one if they want to, meaning they can benefit from the changes.

This means that around 18 million people will ultimately be able to withdraw their pension flexibly should they wish to do so.

4. Everyone who will be able to take advantage of the new reforms will be able to access free and impartial guidance.

This will help people make confident and informed choices on how they put their pension savings to best use.

This guidance will be available through a number of different channels – via an online tool, over the phone, or face to face. Individuals will be able to choose the channel, or mix of channels, that they find most convenient.

It will be entirely impartial, so won’t be given by anyone who could be trying to sell you a product.

5. Your pension provider or scheme will be required to tell you about the guidance and how to access it.

Accessing the guidance will be arranged by your pension provider, who will be required to tell you about it.

6. The changes will come into effect from April 2015.

If you are over the age of 55, or will be from April 2015, you will be able to take advantage of the new system from then.

If you’re younger than 55 then you will be able to take advantage of the new system when you do reach 55.

7. You don’t need to do anything until then.

If you’re thinking about retiring soon, you don’t need to do anything in the meantime, but the government has also made other changes to enable peope to save until then, such as its reforms to ISAs.

You can find more information about the pension reforms by reading HM Treasury’s factsheet that was published at the time of the Budget explaining the differences between the new changes and the old system, or more read details on its response to the consultation.

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Categories: News, Small Caps

About Author

Charlotte Lloyd

Charlotte Lloyd is a journalist who writes regularly for Every Investor.