Answered by Stephen Moore
Freedom of choice
The ‘pension freedoms’ completed the 20-year evolution of what’s known as ‘income drawdown’. This is the chief alternative to taking a set level of tax-free cash at retirement (the maximum is usually 25%) and using your remaining pension pot to buy an annuity.
Under income drawdown, your pension pot remains invested where it can continue to grow tax free. You access it by ‘drawing down’ tax-free lump sums or a taxable income as and when they might be needed.
Time to get ‘flexi’
The pension freedoms essentially increased the flexibility of income drawdown arrangements by replacing the two previous type of contract – known as ‘flexible’ and ‘capped’ – with a new type of contract called ‘flexi-access drawdown’.
The pension freedoms also abolished the previous 55% ‘death tax’ on pensions meaning that those who die before age 75 can pass their (money purchase) pension wealth along to their beneficiaries tax free. The beneficiaries of those who die after age 75 will be subject to income tax on any pension funds they might inherit.
With new flexi-access drawdown you can:
- Cash in your whole pension pot with the first 25% tax free and the rest subject to your marginal rate of income tax
- Take up to 25% of your pension as a tax-free lump sum (or more if you have a protected lump sum)
- Take a series of lump sums as and when you might need them
- Leave all your pension pot invested until you need it
- Drawdown a regular taxable income
- Start taking benefits from age 55 or earlier in the case of ill health
- Continue contributing up to £4,000 a year to your existing pension plan
- Pass your pension savings to your loved ones in a tax-efficient way
For many, these increased freedoms have made it more attractive than ever before to take control of their own pension savings and this is what’s driving the rise in pension transfers, despite the new law requiring that all those contemplating a transfer from a final salary scheme worth more than £30,000 need to seek professional financial advice.
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