UK Pension Regulation Changes 2015

New regulations about access to your pension funds are aimed to give people more flexibility but be careful about what you choose to do. From 6 April 2015, anyone over 55 can take their entire pension as cash, with 25% tax-free. Get professional financial advice before doing anything.

Example:

• Someone born on 1st May 1953 so just turned 62.
• There is £30,000 in your pension pot.
• You are not yet retired and are on an average income of £27,000 per year.

Option A: Take out the entire £30,000 - but you'll only get £21,428 as only £7,500 is tax free and an emergency tax of £8,572 has been deducted from the rest by HMRC. You can claim back £2,651 of that (using form P53) as you are still working (different forms if you are not), leaving a net charge of £5,921. Around £2,845 of that tax will be paid at 40%. Although you have never earned enough to pay higher-rate tax, the taxable part of the pension pot is added to you income, taking you over the £42,385 threshold for higher-rate tax. So you could have around £24,000 in your pocket but no pension to come.

Option B: Take the tax-free £7,500 and buy something. Either use the remaining £22,500 to buy an annuity income (taxable) of £92 per month fixed for life or £57 a month rising with inflation. Or put the £22,500 into a drawdown scheme and take out amounts on occasion for a holiday or treat; the sums would be taxable when taken out but as long they are modest would only be taxed at basic rate. There would also be charges but hopefully not more than the amount the money earned.

State pension: If you do either of these, you'll be relying on the state pension for your retirement income. When you reach pension age for someone born on 1st May 1953 (6 July 2016 for a woman and 1 May 2018 for a man - ages are still changing till the goal of a single pensionable age is reached) you would get a state pension of around £8,000 a year to live on, assuming you qualify for the full state pension.

[My note: The state pension age is presently 65 for men, while the age for women is in the process of being increased from 60 to 65 (parity at the end of 2018). The age for both will then be raised in stages to 67 years by 6 April 2028 and to 68 years by 2044-2046.]

Paul Lewis in Radio Times, 16-22 May 2015