2015 Pension Rules
The changes explained
Before the 2015 changes, the only real option if you wanted to access your pension was to enter a flexible or capped drawdown scheme. These were complex arrangements, with restrictions on minimum qualifying incomes and limitations on how much you could continue to invest in your pension. They were administered by pension providers and often came with hefty fees to cover the management of the complex rules. All that has now changed and you can now access your pension and plan an income for your retirement in a number of new ways.
Annuity Considerations (updated 8th July 2015)
If you are already retired and are in receipt of an annuity you have the option of continuing with the annuity or possibly exchanging it for a lump sum under the Government’s proposals brought forward after the budget. I say possibly because this option has yet to be fully explained and the concept has been out consultation with the pensions industry. Partly as a result of that consultation the Government announced in the July budget that it would be delaying implementation of the secondary annuity market until 2017 from 2016 due to concern about the impact on savers. Watch this space for an update that has been promised for Autumn 2015. This is covered in more detail in our Annuity pages.
If you are approaching retirement then you have many more options available to you:
Withdraw your whole pension in one go
This is the nuclear option and has led to much press speculation about how some foolhardy pensioners might splash all their money on a new Lamborghini, leaving nothing for when they are older.
Buy an annuity to guarantee an income for the rest of your life
This option has always existed, and was a requirement at certain ages under the old rules. For many people, the certainty of a fixed income for life may still be the best solution for their particular circumstances. But annuities are relatively inflexible once set up and the amount of fixed income you can buy with your annuity is currently at an all-time low, as this research from Moneyfacts shows.
Make a number of regular or ad hoc lump sum withdrawals
The new pension drawdown rules now allow you to make regular or one-off withdrawals from your pension pot whilst keeping the remainder of the pot invested. This in my humble opinion is the major advantage to the new rules, and much of the UK Pensions Blog is about how best to manage this freedom if you decide it is for you.
This option allows you to either withdraw 25% of your pot as a tax free sum, and then take regular income from the remainder (all of which will be taxed at your marginal rate of tax) or to make regular withdrawals as income, each withdrawal being made up of 25% which will be tax free and 75% of which will be taxed at your marginal rate. This is a great way to manage your tax affairs and minimise the amount of tax you will have to pay. It is of course not quite that straightforward and we have much more information about tax issuesin the Tax Section.
As income is not guaranteed, there is a significant risk to your income if your investments do poorly, and running out of money towards the end of your retirement is a real possibility. Our pension drawdown calculators can help you decide if this is the right approach for you, and can help you plan for different scenarios if you decide to go ahead. Our Risks and Psychology section covers the risks in more detail and explains why, even if you know the risks, you may not take much notice of them.
Mix and match the options above
Many people will want the security of some kind of guaranteed income to cover basic costs and bills in their retirement, and an annuity is one way of securing this. The rest of your pension can then remain invested to provide a variable income or one-off withdrawals, with peace of mind that your essential costs will be met. An emerging alternative to the inflexible nature of annuities is the Guaranteed Income Drawdown policy. This is a product that sits in between the normal income drawdown – where poor performance in the early years of retirement can result in running out of money in later years, and the annuity – which once bought can not be changed. Costs are higher than for a normal drawdown but may suit you if you are more cautious – in other words, not prepared to accept the very low annuity rates but concerned at going for the full drawdown.
Not surprisingly there are lots of caveats, conditions and considerations to each of the above options so, with thanks to the folks at Hargreaves Lansdown and BestInvest, from whose excellent Fact Sheets on the changes I have drawn liberally, you can find all the nitty gritty about the changes on the dropdown menus in this section of the Blog.
If you are more of a visual person then we also have The UK Pensions Blog YouTube channel containing carefully selected videos from providers and independent sources on all aspects of the UK Pensions scene, including a Playlist of videos on the 2015 Pension Rules. Click on the video menu bar top left to view other videos in the 2015 Pension Rules playlist.