What do the new pension freedoms mean?

retired-couple-in park-300April 2015 saw the introduction of ‘pension freedoms’, which essentially gave those aged 55 and over wider access to their pension funds.

In previous years, this meant being able to take a quarter of their ‘defined contribution’ pension (ie: one based on how much they paid into it) as a tax-free lump sum, but invariably using the rest of the money to buy an annuity designed to pay out an income each year for the rest of your life.

Video: How we manage money has changed over the generations

Now, however, those over the age of 55 have the ability – should they want to – to withdraw the whole amount as a lump sum to help fund this new stage in their life: 25% tax-free as before, and the remaining amount taxed like a salary, at income-tax level.

It’s not without its risks of course, as there could be a large tax bill and the money could run out. So it’s a good idea to get financial advice beforehand.

Almost half (44%) the people asked in a new Experian survey of over-55s[1] told us they are concerned about their financial future, with over half (56%) worrying about not having enough savings and (55%) not having disposable income.  In fact, 40% had concerns over high monthly bills.

Joanna Fowler from Saga Finance told us: “For many people retiring simply starts a new chapter in their life. It can mean they have more time to spend doing things they like, whether that’s hobbies or travelling or enjoying time with children and grandchildren.

“However, this could have significant tax implications so it is important to consider your spending and whether there is a need to take the money in one go, especially considering this money is likely to be needed to fund the whole of your retirement. “

The government’s free Pension Wise website can help you assess the options available, and if you’re 50 or over you can book a free phone or face-to-face appointment to discuss them. Speaking to a financial adviser registered with the FCA (Financial Conduct Authority) is a good idea too.

With pension pots you do have the chance to mix options, so it is possible to set aside some for the above option, but put another part of your ‘pot’ into an annuity or leave it untouched until a later date.

It’s never easy to know how much you’ll need to have set aside for your retirement, which is why it’s useful to think ahead and also to monitor your credit rating, which can help you take control of your finances.

Even if you’ve paid off your mortgage and don’t have debts, maintaining some credit accounts can help ensure that you still have some recent credit history available on your report, if you think you may need to apply for new credit in the future.

[1] All figures, unless otherwise stated, are from YouGov Plc.  Total sample size was 1051 adults aged 55+. Fieldwork was undertaken between  4th – 7th April 2016.  The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 55+).

 

 

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