Pension Changes Explained – What are the ‘New Pension Freedoms’?

Pension Changes Explained – What are the ‘New Pension Freedoms’?

There has been a lot of talk about the new pension freedoms as the date they come into force draws closer. However, most people aren't entirely clear on exactly what this means. Below we give an overview of the changes coming into force next month and what they mean for you.


Ability to Access your savings

The most discussed change to the pension rules changes how you access your defined contribution savings (sometimes known as money purchase schemes). These are also known as 'money purchase' schemes.

This is a type of workplace pension where the money is invested by a pension provider that has been chosen by your employer. The amount you receive when you retire will normally depend on:

  • How much has been paid into the scheme
  • How long you've been paying into the scheme
  • How well the investment has done since you have been paying in.

From 6 April 2015, if you are aged 55 or over, you will be able to access as much of your defined contribution pension savings as you like. There will be three main options for withdrawing the money but you will be able to choose any combination of them.

Some schemes do not offer all of these options and they are not required to by the law. However, you can discuss which options are available to you with your pension provider.

It is also possible to transfer your pension savings to a pension provider that does offer the option you think would be best for you.

You can also find out more about early pension release advice on UnlockMyPension here.

Buying a Lifetime Annuity

Similarly to the current rules, you use some or all of your funds to buy an annuity which will be payable at least for the rest of your life.

When you purchase an annuity however, you will be able to take a tax-free lump sum of up to 25% of your pension pot at the same time. This may allow you to save money on tax.

Flexi-Access Drawdown

Under the new law, as you can at the moment, you will be able to put funds into drawdown. However, as of 6 April there will be no limit on how much or how little you take from your drawdown fund each year.

Furthermore, when you put funds into drawdown, you will be able to take a lump sum of up to 25% of your pension pot at the same time.

Lump Sum Payment

Under the new pension rules, you can also take money directly from your pension pot without having to buy an annuity or put the money into drawdown - and 25% of this sum will be tax-free. The term for this is an 'uncrystallised funds pension lump sum' (UFPLS).

Tax On Payments

One of the big considerations and things you may need advice on is tax. All payments from annuity or drawdown will be taxable as income. Also, 75% of any amount of UFPLS will also be charged as income.

The amount of tax you will pay and the rate of tax you will way will depend on how much in payments you receive in the tax year in addition to any other taxable income you may have.

The Government service, Pension Wise is free to use and can help you further understand the pension freedoms. We will also be providing further free legal help in the form of our guides soon.

Free Legal Help & Advice Online

For more free legal help and guidance on new areas of the law, please read our free online legal guides.

Follow us on Social

Twitter - @unlockthelaw
YouTube - UnlockTheLaw

Bad Teacher - When Will Classroom ‘Banter’ Get a T...
Can I build in the Woods? - “Fairy Control” Intro...


Unlock The Blog

Please enter your name.
Invalid email address