Stephen Casey explains the new laws on freedom and choice in pensions and highlights what you can do to boost your pension at retirement.

Know your options

In the 2014 Budget the government announced the most fundamental reform to the way that people can access their pension in almost a century. It abolished the effective requirement to buy an annuity and announced plans to give people much greater freedom over how they access their pension savings.

The new legislation, which became known as ‘Freedom and choice in pensions’, introduced new ways by which pension savings could be accessed. Now members who have pensions outside of the public sector pension schemes (Local Government Pension Scheme or Teachers’ Pension Scheme) or additional pensions to the public sector schemes, such as Additional Voluntary Contributions (AVCs), private pensions or the Teachers’ AVC, have increased flexibility in the options available to them when taking their pension benefits.

Overview

From April 2015, the tax rules were simplified to give people over 55 unrestricted access to their own fully funded pensions outside of the public sector pension schemes. The changes offer greater flexibility when it comes to taking money out of your AVCs, private pensions or the Teachers’ AVC administered by Prudential.

What does it mean for you?

From age 55 you can, depending on your provider:

Take all of your money in one go. 25 per cent of this sum would be tax-free with the remainder added to your income for the year and taxed accordingly at your marginal rate for that tax year.

Take partial withdrawals on a regular or ad hoc basis. On each withdrawal, 25 per cent of it is tax-free with the remainder added to your income for the year and taxed accordingly at your marginal rate for that tax year.

Take a tax-free lump sum and flexible income. Take a 25 per cent tax-free lump sum with the remainder used to provide taxable income. In order to do this you must transfer into a drawdown plan and you may need to take financial advice.

Take a tax-free lump sum and a guaranteed income for life, or as it is commonly known, an annuity.

You can take a combination of these options, or you can continue saving or leave your money invested, as long as your pension provider has these products in place. The government has already announced that the above options will move from age 55 to age 57 by 2028, in line with the move of the state pension age from 65 to 67 over the same timeframe. So if you wish to retire early or switch to a more flexible working pattern in the future, then having additional pension funds could help you to do so.

The new pension freedoms allow members to access some or all of their other pension funds while still accruing rights and service under the Local Government Pension Scheme or Teachers’ Pension Scheme. For example, they could be used to top up income, replace income when moving to part-time or subsidise a reduction when taking early retirement with a reduced pension.

Building up an additional pension pot alongside your public sector pension could help you choose the retirement you want, such as retiring early, reducing your hours or building up a larger pot of retirement funds. As well as receiving 100 per cent of your benefits as a cash lump sum, however, 75 per cent of this would be taxed at your marginal rate.

There are several ways in which you could boost your pension in retirement:

• Buy additional pension within your own scheme.
• Increase your accrual rate (in the new career average revalued earnings (CARE) scheme for teachers).
• Buy out some of your actuarial reduction (new CARE scheme).
• Take out an AVC.
• Take out the Teachers’ AVC with Prudential, providing a number of options for increasing your teachers’ pension benefits.
• Take out a private pension scheme.

Finally

Do not forget to take into account that increased contributions will affect your annual allowance (see my previous Leader article on this at http://tinyurl.com/oaryrze) and that there will be a new limit on the lifetime allowance (see my Leader article at http://tinyurl.com/nwxzsyj) for pensions from April 2016.

Some useful contacts

www.pensionwise.gov.uk

www.pru.co.uk/rz/teachers or call their UK-based team of retirement specialists on 0800 151 3338.

Your professional development

Book your place on our Financial Planning for Retirement Seminar on 2 February 2016 in Leicester. See here for more: www.ascl.org.uk/retirement_seminars

Stephen Casey is ASCL Pensions Specialist

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