What is Pension Freedom?
The new rules introduced in April 2015 for pensions by Geroge Orsbone are now referred to as the Pension Freedom. These brand new rules introduced more flexible ways for a retired person to use their pension savings and opened new opportunities for them. Pension Freedom empowers pensioners to control how they want to withdraw the pension money. The Government introduced these reforms to open new horizons for pensioners and give them more choices about spending or investing their money. These new flexibilities were available for pension, but not all pension providers offer these. If they don’t, then it’s not that you cannot do something about. All you have to do is switch your pension provider and transfer your funds into another one that offers these new options introduced by Pension Freedom.
What Kinds Of Pensions, The Pension Freedom Reform Applies To?
Pension Freedom is not applicable to every type of pension. It only applies to Defined Contributions or Money Purchase Pension. These types of pensions are the ones when a person or its employer saved up a sum for retirement. The Pension Freedom reforms don’t apply to the final salary scheme, state pension or defined benefit. Before the pension freedom changes came into effect, the standard option used by most people was to cash in their pension, take 25% of that tax-free and invest the rest of the money in an annuity. It is a product that pays an annual income for the rest of your retired life.
What Are The Options Available After Pension Freedom?
After the Pension Freedom reforms, the pensioners are free to use their pot as they would like but all these choices are only available for people who are 55 years old or above.It allows you to take all the money out of the pot in one go, but it’s not the best idea and not recommended at all.
Pension Freedom doesn’t change the fact that pensioners can only take a sum of 25% from the pot without paying tax so if you are planning to take out all your cash from the pool in a single go, only the 25% will be tax-free, and the rest would be taxed. The whole objective behind pension is to support retired people for the rest of their life after retirement, which can be extended. So taking all the money out in a single go or very early after retirement is not the best option. If you’re wondering what other choices you have with Pension Freedom. The three primary ones are mentioned below
- You are allowed to leave the money invested in your pension and withdraw only when you need it. Whenever you want to withdraw the money, you can get 25% tax-free money on each withdrawal.
- The second option is to take 25% of your pot money, tax-free, and then from the remaining pension pot, you can buy flexible income drawdown products. In this case, the rest of the money is invested, and there is a chance it will grow over time. In this option, you can also take the money for income in times of need. The taxing conditions are different in this option. The initial 25% withdrawal is untaxed, and the rest is taxed every time you take the money out. It’s best for people who are in a low taxed bracket after retirement.
- The third option is the same as it was before the Pension Freedom came into effect. In this option, you can take 25% tax-free money and then purchase an annuity that provides a guaranteed annual income all your retired life.
There is no restriction about choosing only one option. Pension Freedom also allows you to combine any of these options as per your suitability.