Your pension as a bank account

On Tuesday last week, the chancellor George Osborne put forward the Taxation of Pensions Bill, which gave further details of the revolutionary pension reforms first announced in the Budget back in March. Amongst the proposals, the chancellor announced that people will be able to use their pension pots “like bank accounts”, withdrawing money whenever they choose.

In addition, it will now be possible to pass your pension pot on to your beneficiaries, with the abolition of the punitive 55% pension “death tax”, as covered in our article dated 01 October 2014. 

The new freedoms offered apply to those aged 55 or over who have a defined contribution pension scheme(s), such as a personal or stakeholder pension, SIPP or AVC. They have certainly brought pensions savings to the fore, as they now look much more attractive, and we are likely to see many more now opting to use pensions again as long-term savings vehicles.

The flagship announcement was about how people can take their cash. Currently, most pensions allow you to take up to 25% tax-free cash from your pension. From next April, you can choose how you take that tax-free cash. You can still opt to take it all in one go, or you can make a series of withdrawals over time, receiving 25% of each withdrawal tax free, with the rest taxed at your marginal rate.

With the latter option, your remaining monies remain invested, so, if your pension investments perform well you could end up with more money available to withdraw over time*.

From April 2015 also, you will have complete freedom in how you take the rest of your pension once you have reached the age of 55. You will still have the choice of an annuity or income drawdown but the income restrictions currently in place on drawdown schemes are being removed, meaning there will be no limits. It will be down to you how much income you take, bearing in mind the more you take, you risk running out of money later in life.

If you don’t need the income, you can of course now simply leave your pension pot invested or just take the 25% tax-free cash, leaving the monies to be passed on tax-efficiently to your beneficiaries.

On a less positive note, newspaper reports are suggesting that some pension providers may struggle to have their systems in place to cope with the changes by April 2015.

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