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Pension reforms: eight things you should know

Understanding the pension system can be complex sometimes. We’ve explained how the new system will work and what it means for you. 

1. We’re completely overhauling the system so you can take your 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 your 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. This is instead of being taxed 55% for full withdrawal, as it has been previously.

2. 25% of your pension pot will remain completely tax-free, as it was before

You’ll be able to access 25% of your 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 is invested by a pension provider chosen by your employers. 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 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.

We’ve now announced that 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.

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

5. 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 an online tool, over the phone, or face to face. Individuals will be able to choose the channel, or mix of channels, that they find most convenient.

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

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

Accessing the guidance will be arranged by your pension provider, who will be required to tell you about it.

7. 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.

If you’re younger than 55 then you will be able to take advantage of the new system when you do reach 55.

8. 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 ourfactsheet 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.

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