In 2015, the Conservative government in the UK made matters a whole lot easier for everyone wanting to save long-term while being able to rely on an extra bit of cash in their later years. The Pensions Freedoms Act was created in an effort to make the idea of saving for post-work years more palatable by making that fund more easily accessible and easier to pass on to loved ones.
So what are the benefits of Pension Freedoms?
- If you have a defined contribution pension (either personal or occupational) you are allowed to access the fund from the age of 55. For younger savers, this may seem a long time to wait, but it allows all individuals to structure how they save and spend more accurately throughout their lives. For instance, when you look forward to your mid-fifties you will know that your pension savings can be available to you without taking the whole retirement pot1.
- You can use those savings how you wish: it may be to pay off an unexpected bill or an ongoing financial liability. On the other hand, it could be used to treat yourself to a bucket-list item you have always been promising yourself.
- You will not get hit hard by the tax-man if you take out any money sensibly. The first 25% you take out of the pot will not be taxed at all. Any other money taken out will be taxed at your income tax rate. Be aware that taking too much out at one time may put you into a higher income tax bracket and you will be penalised. It is recommended that if you are contemplating accessing money from your pension fund, you seek out the help of a regulated financial adviser first.
- Pension Freedoms allows you to access your pension savings in a number of different ways. First of all, you do not need to take out any money at all. But if you do, you can take it out in a number of small chunks, draw the money down in the form of an income (this is called drawdown) or you can take it all out in one big chunk. While an extra income can complement your work income at the end of your career, a chunk of money can be great for paying off a burdensome debt or giving yourself a treat. Any monies left in the fund will continue to be invested.
- As well as being able to mix the above options, you can also use your pension savings to buy an annuity. That is a pot that will pay you an income for the rest of your life.
- You are able to leave money in your pension fund to anyone you wish. This money will not be swallowed up by inheritance tax if you die before age 75. If you die after age 75 the beneficiary will pay income tax on the withdrawals they make. It is therefore essential to make sure that the person (or persons) you wish the money to go to in the event of your death is named on the pension policy.
There are many benefits with Pension Freedoms but always remember that your pension savings were primarily to keep you secure in your retirement years and releasing your pension early could leave you worse off in retirement. As stated above seek out the help of a regulated financial adviser to ensure you are aware of all the pitfalls as well as the benefits.