What Is Pension Freedom? – TaxBack

from the blog.

What Is Pension Freedom?

What You Need to Know About the Pension Freedom

Come April 6, all-over 55s will be able to access their pension
and do away with it as they please, thus the term Pension Freedom.
It is one of the financial products that industry figures developed
to meet people’s needs.

Your Pension

Although the government has already made it easier for people to
access their pension savings with flexibility or withdraw a lump
sum, pension freedom allows savers to do so much more with the
money they have worked so hard to save all their lives.

Apart from flexible access to their pension pot without being
hit with punitive tax rate, people would also be able to pass on
unused defined contribution pension funds to a nominated
beneficiary upon their demise, which is better than the 55% tax
charge currently in effect that pensioners have to pay.

Moreover, since pensioners now have the option to invest their
money any way they want, everyone is looking forward to new
financial products that will be developed to accommodate savers’
needs.

Excited to dip your hands in your pension pot? Whilst you have
the freedom to do with your savings as you please, it is important
to always make a wise decision. So, how can you make the most of
pension freedom?

Know how much income you need in retirement

Whether you invest your money or spend it for a holiday in the
Caribbean, it is important not to underestimate the income you need
for the remainder of your life span. Even at the age of 55, you can
still make a foolish decision, which is why some are pushing to
raise the age to 60 to reduce risks. But you can protect yourself
and your money by making calculated moves. According to John
Hutton, an adviser at Redington, “A minimum 15% target was needed
to sustain a ‘comfortable’ retirement”.

Know your pension type

How much you get depends on the type of pension you have been
paying. For defined contribution pensions, the amount you get is
based on the amount you paid, how long you have been investing, and
the performance of the investment bought using your money.

As for defined benefit, the amount depends on your length of
tenure, salary and the calculation made following the rules of the
pension scheme.

What to do with your pension pot?

Regardless if you have private, work place pension or both, you
will be able to access 25% of your defined contribution pension
without paying any taxes, the rest you can take as cash, flexible
income or an annuity. You can also mix one or two of these options.
Or, you can leave your pension pot untouched. It would not be
called Pension Freedom if you will be forced to access your
savings, even if you do not want to.

Enjoy your pension tax free

As already mentioned, 25% of the money in your pension pot can
be withdrawn tax free. If you want to avoid paying tax in ensuing
withdrawals, keep cash sums to a minimum or 25% of the remaining
amount. As what Chancellor George Osborne has announced, “People
will be able to dip in and make as many withdrawals as they want,
each time getting 25 per cent tax-free and the rest taxed like
income”.

Know that the Pension Freedom reforms only apply to defined
contribution or money purchase pension schemes, and not to
gold-plated final salary pensions.



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