Have you seen the recent increase in the number of pensioners rolling down the local streets in high-end vehicles? Perhaps not, but that was certainly the case in April 2015 when new pension freedoms were introduced. Pension freedom was enacted to give individuals much more power over what to do with their generous contribution pensions after reaching state pension age. The pension freedoms undeniably represented a significant shift in how people can access their pensions. Read on to learn whether they’re outstanding enough.
You Don’t Need to Purchase an Annuity
Having the ability to freely access DC (Defined Contribution) as people wished from retirement point is perhaps the most recognisable radical change. With these kinds of pension arrangements, the amount of money you end up with when it comes to retirement is primarily based on the investment’s performance into which your retirement savings are placed. Previously, an annuity would pay a fixed income throughout people’s life after purchasing it via their pension savings. The new rules have changed this concept – you can get all your pension savings after reaching 55 years and do whatever you want with them.
The Pension is Withdrawable in One Go
When it came to changing pension savings into money, especially people with defined contribution pension plan, purchasing an annuity was the only proven option. Since April 2015, it is no longer the case. However, individuals who need the guaranteed income offered by annuity can still opt to follow this route.
For instance, if you have a £200,000 pot, you can still withdraw up to £50,000 (25 %) as a tax-free lump sum. But today, you have the following options.
- Withdraw the remaining £150,000 instantly, or in lump sums, and then pay income tax at the marginal rate of 20 %, 40 % or 45 %.
- Purchase an annuity with the £150,000.
- Invest the balance in the stock market and get as much or as little income as you need.
- Purchase an annuity with a portion of the savings, invest the rest, or withdraw it and use.
Much More Flexibility on the Drawdown Income
Income drawdown had previously been a route that only individuals with large pension pots of over £ 200,000 had been able to consider. It enables users to invest their pension funds in the stock market, and then withdraw income as and when they wish. The changes meant that the drawdown income became a realistic choice for those with much more modest retirement savings. The enactments made after April 2015 are all ‘flexible-access drawdown’ products. This enables individuals to withdraw as much as they want every year and no longer need to have a minimum income requirement. However, the money taken out is subject to taxation.
Is the Pension Calculator Useful When Calculating Income Drawdown?
Yes. Find much more info about income drawdown and utilise our pension calculator here. A pension calculator is an indispensable tool for analysing people’s pensions performance. The best thing about using one is that it gives you a sense of how much you presently have towards your retirement. In simple terms, it sets the target amount that you need to save towards your pension.