Pension reforms – what the new rules could mean for you

People who have worked hard and saved all their lives want greater flexibility when it comes to managing their retirement savings. The April 2015 reforms introduced by George Osborne will allow over 300,000 savers aged 55 and above greater flexibility to manage their defined contribution pension as they wish, subject to the rules of the scheme.

As part of the Taxation of Pensions Act 2014, these new rules mean that individuals can access as much or as little as they want with the ability (in certain circumstances) to pass on hard-earned pensions to families tax free.

Key changes for those affected:

Get the freedom to manage your funds

Under the new rules, those eligible will have the flexibility to take a series of lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at the marginal rate. This marks an end to the 55% tax that would have previously been payable on the remainder after taking their tax free allowance. Furthermore, individuals will be able to transfer to a defined contribution pension scheme from a defined benefit pension, although those with an unfunded defined benefit pension scheme will be less able to switch.

Take advantage of the options available
Retirement annuities have been badly impacted by low interest rates and increased life expectancy. Bearing in mind that once annuity rates and terms are agreed they cannot be changed and that money often cannot be passed on, it makes sense to explore other options.

Take personal control
The entire amount of defined contribution pension pots can now be withdrawn from the age of 55 onwards (subject to the scheme rules), although this can carry significant tax implications. Having taken their funds, individuals will have personal control outside the pension fund to spend and invest at will, but will lose the advantage of the tax shelter that a pension offers, both in terms of growing that money or in relation to Inheritance Tax.

Draw down funds with flexibility
To help manage income within annual personal allowances or marginal income tax rates, funds from pension pots can be drawn down over time. The 25% tax free portion can either be crystallised in one go or taken in a series of phased withdrawals alongside withdrawals from the taxable portion.

Keep your money where it is
Individuals can also opt to leave savings invested in existing pension plans, thereby continuing to benefit from the tax efficient investment environment. Alongside this approach it would be advisable to conduct a review of the investment opportunities being offered by your provider, as many offer a range of options mixing property, bonds and equities, depending on your appetite for risk.

Keep your options open
Depending on individual circumstances, a combination of various approaches might be preferable. This could include withdrawing the tax free lump sum in full or in part and investing a proportion in a lifetime or short term temporary annuity. The benefit of this would be the freedom of flexibility along with the security of effective retirement planning.

Be well prepared
The changes also mean that individuals will have the freedom to pass on their unused defined contribution pension to any nominated beneficiary if they die under 75, as opposed to paying the 55% tax charge that currently applies. If they die after the age of 75 the pension fund lump sum can be passed to a person of their choice – however, if taken as a lump sum it will be liable for tax at 45%. Alternatively, the fund could be left and used to draw a regular income which would be subject to tax at the normal marginal rate. Another way to mitigate the impact of inheritance tax is to set up a family trust. Bank of Scotland Private Banking can help you with this and other financial planning choices.

Tax treatment depends on individual circumstances and may be subject to change.

This article has been provided to Bank of Scotland Private Banking by external/third party contributors and contains their views as at July 2015 and should not be relied upon as fact and could be proved wrong. The information and opinions may not be accurate after this date. The views expressed may not reflect the views of Bank of Scotland plc.

Bank of Scotland Private Banking assumes no responsibility for the content or any reliance upon the content of the third party websites detailed in this article.

Bank of Scotland plc. Registered office: The Mound, Edinburgh, EH1 1YZ. Registered in Scotland, no. SC327000. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number 169628.

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