When can I access my pension?
Under current pension rules 25% of the value of a pension fund can be taken as tax free cash. The balance is used to provide income over the individual’s lifetime.
Clients have often told me they weren’t keen on saving into pensions because of the restrictions on when and how you can access the fund. However, I always thought that was quite sensible because of the attractive tax allowances the government give us for saving into a pension.
I could see the logic that the government didn’t want to give big tax allowances for saving into a pension which we would then be able to withdraw and use for a round the world cruise, or to purchase a Lamborghini as pensions minister Steve Webb has suggested.
However, the 2014 budget introduced a new proposal that from 6th April 2015 anyone over the age of 55 will be able to take their entire pension fund as cash. As with current rules, the first 25% of the pension fund will be available tax free. The balance will then be taxable as income, and will be taxed at your marginal rate of tax. This means that dependant on your existing earnings and dependant on the size of your pension the tax rate could be as high as 45%.
This proposal applies only to defined contribution schemes. Defined benefit schemes (also known as final salary schemes) are excluded from these rules.
But just because you can access it all at age 55, doesn’t mean that’s the right thing for you to do!
You need to consider what you will live on if you spend your pension proceeds. The basic state pension is increasing to £145 per week from April 2016. If you believe that’s enough for you to fund your lifestyle you may be comfortable with the thought of blowing your entire personal pension on a round the world trip.
Buying an annuity (an income for life) is no longer a requirement. But it may the right thing for your circumstances. Many women who have gone through divorce are very cautious in relation to their finances. An annuity provides certainty of how much you will receive and the certainty that it will last for as long as you live.
There are downsides to an annuity- a big one being that if you die early you will not necessarily have had value for the amount you gave the provider. You do not get any amount back into your estate for your beneficiaries.
To decide what’s right for you, talk to your adviser. Your adviser will look at your circumstances and weigh which option is most appropriate for your circumstances, and what it is you are aiming to achieve.
If you have concern on your pension options and would like an initial no obligation discussion please do contact me on 01932 698150
photo credit:flickr/Simon cunningham
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