New system to encourage further pension saving
Currently someone in income drawdown cannot receive tax relief on future contributions. To encourage further pension saving under the new system:
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Retirement products
Tax rules amended to allow greater innovation
The tax rules will also be amended to allow innovation in retirement products. This is happening in a number of ways:
Payment options
Defined benefit pension schemes beyond 6 April 2015
The transitional rules on triviality and small pots will continue to apply to defined benefit pension schemes beyond 6 April 2015. The minimum age for accessing pension savings in this way will reduce from 60 to 55.
Defined Benefit transfers
Safeguards to protect pension benefits
Transfers from defined benefit schemes to defined contribution schemes will continue to be allowed (but will exclude pensions that are already in payment). However, transfers from defined benefit schemes to defined contribution schemes will be restricted for members of unfunded public sector schemes, although you may be allowed to transfer in very limited circumstances.
Defined Contribution Pension Schemes
Building up a pot of money that can be used to provide an income in retirement
With a defined contribution pension, the member builds up a pot of money that they can use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income the member might get from a defined contribution scheme depends on factors including the amount they pay in and the fund’s investment performance.
Defined Benefit Pension Schemes
Salary-related pension based on the number of scheme membership years
Some employers offer these schemes, also known as ‘salary-related pension schemes’. When someone retires from the scheme, it pays them a pension where the benefit is based on rules set out by the scheme.
Open Market Option
Shopping around to obtain a higher rate
Prior to the commencement of the pensions reform changes, historically purchasing an annuity has been the most common way of turning someone’s pension savings that they’ve built up over the years into an income that will last them the rest of their life.
Pension fund access in full
New legislation allows increased payment flexibility
If someone is a member of a defined contribution scheme from 6 April 2015, they will be able to access their pension fund, in full, without needing to purchase an annuity. With a defined contribution pension, you build up a pot of money that you use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income you might get from a defined contribution scheme depends on factors including the amount you pay in and the fund’s investment performance.
Flexible rules
The tax-free lump sum of up to 25% of the fund will remain available, with any remaining balance taxed as income. These flexible rules will apply to Additional Voluntary Contributions (AVCs), an extra pension contribution members of an Occupational Pension Scheme can make to help boost their income in retirement. In addition, these flexible rules also apply to cash balances and some hybrid schemes, subject to the pension scheme rules.
New arrangement
The new legislation also allows schemes to bypass their present rules, to allow them to give the increased flexibility to their members. But, as the rules are permissive, scheme providers can choose not to
offer the new flexibility. If this happens, someone may have to transfer to a new arrangement to take advantage of the new payment flexibility.
Transfer benefits
Currently, you only have the right to transfer pension benefits up to a year before your scheme’s normal benefit age, and the Open Market Option doesn’t force providers to offer transfers to any other products. However, from 6 April 2015, this legislation will be amended allowing transfers right up to the point of retirement.
Approaching retirement
The Open Market Option (or OMO) was introduced as part of the 1975 United Kingdom Finance Act and allows someone approaching retirement to shop around for a number of options to convert their pension.
Who benefits from pensions freedom?
Taking advantage to legally minimise the tax paid
T he main beneficiaries of the pensions freedom reforms are likely to be those who have built up relatively large pension pots, who will be using this freedom to avoid paying 40% tax when they draw it down under the new freedoms.
Pensions freedom
10 things about the wide-ranging
changes you should know
The pension system is completely being overhauled to enable individuals to take their defined contribution pension how they like in order to create greater choice and flexibility. These changes were announced in Budget 2014. From 6 April 2015, no matter how much an individual decides to take out from their defined contribution pension after retirement, withdrawals from their pension will be treated as income; the amount of tax they will pay on what they withdraw will depend on the amount of other income they have in that year, as long as you are 55 or over. This is instead of being taxed 55% for full withdrawal, as it has been previously.
