News story

Pension reforms: nine things you should know

This news article was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

We explain how the new system will work and what it means for you.

1. We’re completely overhauling the system so you can take your defined contribution pension how you like

In order to create greater choice and flexibility for people who have saved hard for their pension, we announced at Budget 2014 a series of changes to how people access their pension.

From April 2015, no matter how much you decide to take out from a defined contribution pension after retirement, withdrawals from your pension will be treated as income; the amount of tax you will pay on what you withdraw will depend on the amount of other income you 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.

2. Subject to your pension scheme rules, up to 25% of your pension pot will remain completely tax-free, as it was before

Most people will still be able to access 25% of their pot in one go without paying any tax.

3. We previously announced this would apply just to people with ‘defined contribution’ pensions

This is a type of pension also known as a ‘money purchase’ scheme.

This is when the money you and your employer pay in to your pension scheme is invested by a pension provider. The amount you get when you retire usually depends on how much has been paid in and how well the investment has done.

4. We’ve now announced that some people who have a ‘defined benefit’ scheme will benefit too

A ‘defined benefit’ pension is typically a promise of a certain level of pension in retirement which is linked to your salary.

People in the private sector or in a funded public sector scheme will still be able to transfer from a defined benefit pension scheme to a defined contribution one if they want to, meaning they can benefit from the changes. Those in unfunded public sector schemes will not be able to transfer.

This means that around 18 million people will ultimately be able to withdraw their pension flexibly should they wish to do so.

5. People can also pass on their pension to others without paying any tax

Instead of paying the 55% rate of tax when passing on their pension, people who die under 75 with defined contribution pensions can from April 2015 pass on their unused pension as a lump sum to a person of their choice tax free.

At the Autumn Statement 2014, the Chancellor also announced that from April 2015 payments from certain kinds of annuities that pay out income after you die (joint life and guaranteed annuities) will be tax-free when paid to a beneficiary, if the original policyholder dies below age 75.

For people who die over the age of 75 with unspent defined contribution pensions, they can pass this on to a person of their choice who will be able to take it as as a lump sum taxed at 45% or as income and pay their normal rate of income tax.

6. Everyone who will be able to take advantage of the new reforms will be able to access free and impartial guidance

This will help people make confident and informed choices on how they put their pension savings to best use.

This guidance will be available through a number of different channels - via the internet, over the phone, or face to face at a Citizens Advice Bureau.

It will be entirely impartial, so won’t be given by anyone who could be trying to sell you a product.

7. Your pension provider or scheme will be required to tell you about the guidance and how to access it

Pension providers or schemes will be required to tell people about the guidance service in the information they send to people when they are approaching retirement.

8. The changes will come into effect from April 2015

If you are over the age of 55, or will be from April 2015, you will be able to take advantage of the new system from then, subject to your pension scheme rules.

If you’re younger than 55 then you will be able to take advantage of the new system when you reach normal minimum pension age under the tax rules (this is currently age 55).

9. You don’t need to do anything until then

If you’re thinking about retiring soon, you don’t need to do anything in the meantime, but we’ve also made other changes to help you save until then, such as our reforms to ISAs.

You can find more information about the pension reforms by reading our factsheet we published at Budget explaining the differences between the new changes and the old system, or more details on our response to the consultation.

Image by 401(K) 2012 on Flickr. Used under creative commons.