How Pension Freedom Rules Affect You

The rules about how retirement savers can take the money from their pensions changed on April 6, 2015.

From this date, anyone over 55 years old with a direct contribution pension can draw their money to spend or reinvest as they wish, whether they are still working or not.

For savers under 55, the money is only accessible if the retirement saver can provide medical evidence showing that they are suffering from a serious illness or injury that prevents them from working.

It’s a good idea to plan how you spend your pension as taking money could see a large chunk of their cash disappearing as tax.

Don’t forget this guide is a general outline of the options and the rules may be applied differently depending on your personal circumstances, so always take professional advice before taking any money.

Which pensions qualify for flexible access?

The key rule is only direct contribution pensions come under the flexible access rules.

These are generally workplace pensions, personal pensions or self-invested personal pensions (SiPP) on which the final pay-out is based on how investments from the fund perform.

Defined benefit pensions are based on final salary and length of service, such as some employer pensions or schemes offered to public sector workers and civil servants.

In August 2015, the British government stopped retirement savers in public sector and civil service schemes from transferring their funds to a direct contribution or Qualifying Recognised Overseas Pension Scheme (QROPS), so they are effectively barred from flexible access.

The State Pension is also excluded from flexible access rules.

Flexible access

Flexible access gives retirement savers several options which can be mixed and matched to take cash from a pension fund. The two main options are: –

  • Uncrystallised pension lump sum

An uncrystallised pension is when the retirement saver takes irregular cash withdrawals.

An uncrystallised withdrawal is taxed in two parts – the first 25% is tax free and income tax is paid on the balance. The tax paid is based on your total annual income.

Savers can draw their pension savings as they like under this rule, even taking the entire pension in one lump sum.

  • Flexible drawdown

Flexible drawdown is a crystallised pension paying income in regular amounts.

The first withdrawal is taken as the 25% tax free lump sum, then the rest is paid as a regular income, which is taxed.

Other pension options

Besides flexible access, retirement savers have some other choices about how they handle their pension pots.

  • Delay taking any money – If you have enough money to live on, you might not want to touch your pension on retirement. You can make contributions until you are 75 years old up to the annual allowance limit, which is currently £40,000.

You might have to discuss this with your provider as their scheme rules may not cater for delayed payments.

  • Buy an annuity

Although no longer compulsory, buying an annuity is still an option for retirement savers. You can take 25% of your pension fund tax-free and buy an annuity with the rest.

An annuity is an insurance-backed investment that pays a guaranteed return for life.

Some annuities offer ‘enhanced’ payments if the buyer has health or lifestyle problems that mean they are likely to die younger than other investors.

  • Pick and mix

Some retirement savers may want to combine one or more of their pension options. This is fine, but it is a good idea to take professional, independent financial advice if this is what you want to do.

Flexible access and QROPS

QROPS providers can adopt flexible access rules on the same terms as the UK rules if they wish.

However, for most financial jurisdictions, this would mean a change in local laws to align pension payment rules with those in the UK.

So far, only regulators in Malta have made this change – although those in Gibraltar and the Isle of Man have indicated that they may take steps to do so soon.

No QROPS provider has introduced flexible access to date.