Pension Freedom - What is it all About?
New options for taking benefits from a defined contribution (money purchase) pension scheme came into effect from 6th April. The freedom applies to everyone from age 55. What should you consider?
The first step is to think about your personal priorities for your pension fund. Do you need access to cash ? Do need a secure income or are you able to take some investment risk and be more flexible about the income you draw ? Are you looking to the pension fund to provide for your family ?
The new freedom to take out as much as you like from the pension fund at any time may look an attractive option and the money can be used for any purpose but: of the sums withdrawn, only 25% is tax free with the remainder being taxed at your highest rate; and you will also need to be confident that you have financial security during the whole of your retirement.
Income can be taken from a pension fund either by buying an annuity (an income for life) and/or by keeping funds invested and drawing down income as required. Avoiding poor annuity rates can look attractive but it does mean exchanging security of income for some element of investment risk. Again it is important to look at the broader context and consider the priorities.
The ability to pass on some of all of the pension fund to family may be important to you but it is only one part of your wider estate and inheritance tax planning. If you die before 75, the pension fund will pass to your heirs without tax liability and with flexibility about how the benefit is taken. If you die after 75, the pension fund can be passed on as a lump sum subject to a 45% tax charge; alternatively, it may be taken by your heirs as income taxable at their marginal rates.
Speak to us about the options and let us help you make the choice that is right for you.