What You Need to Know About the Pension Freedom
Come April 6, all-over 55s will be able to access their pension and do away with it as they please, thus the term Pension Freedom. It is one of the financial products that industry figures developed to meet people’s needs.
Although the government has already made it easier for people to access their pension savings with flexibility or withdraw a lump sum, pension freedom allows savers to do so much more with the money they have worked so hard to save all their lives.
Apart from flexible access to their pension pot without being hit with punitive tax rate, people would also be able to pass on unused defined contribution pension funds to a nominated beneficiary upon their demise, which is better than the 55% tax charge currently in effect that pensioners have to pay.
Moreover, since pensioners now have the option to invest their money any way they want, everyone is looking forward to new financial products that will be developed to accommodate savers’ needs.
Excited to dip your hands in your pension pot? Whilst you have the freedom to do with your savings as you please, it is important to always make a wise decision. So, how can you make the most of pension freedom?
Know how much income you need in retirement
Whether you invest your money or spend it for a holiday in the Caribbean, it is important not to underestimate the income you need for the remainder of your life span. Even at the age of 55, you can still make a foolish decision, which is why some are pushing to raise the age to 60 to reduce risks. But you can protect yourself and your money by making calculated moves. According to John Hutton, an adviser at Redington, “A minimum 15% target was needed to sustain a ‘comfortable’ retirement”.
Know your pension type
How much you get depends on the type of pension you have been paying. For defined contribution pensions, the amount you get is based on the amount you paid, how long you have been investing, and the performance of the investment bought using your money.
As for defined benefit, the amount depends on your length of tenure, salary and the calculation made following the rules of the pension scheme.
What to do with your pension pot?
Regardless if you have private, work place pension or both, you will be able to access 25% of your defined contribution pension without paying any taxes, the rest you can take as cash, flexible income or an annuity. You can also mix one or two of these options. Or, you can leave your pension pot untouched. It would not be called Pension Freedom if you will be forced to access your savings, even if you do not want to.
Enjoy your pension tax free
As already mentioned, 25% of the money in your pension pot can be withdrawn tax free. If you want to avoid paying tax in ensuing withdrawals, keep cash sums to a minimum or 25% of the remaining amount. As what Chancellor George Osborne has announced, “People will be able to dip in and make as many withdrawals as they want, each time getting 25 per cent tax-free and the rest taxed like income”.
Know that the Pension Freedom reforms only apply to defined contribution or money purchase pension schemes, and not to gold-plated final salary pensions.