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Pension changes 2015 explained – As of 6th April the new rules apply.

The biggest changes UK pension rules in 100 years, which the Conservative Chancellor announced in his budget last year, come into force at midnight on 5 April 2015, in what Chancellor George Osborne has called “a revolution”.

People aged 55 will all be given new powers to decide what to do with their retirement savings, which includes cashing in their whole pension pot, if they so wish, and so long as it is a defined contribution pension type scheme.

There are income tax consequences associated with taking out your funds from you scheme and the government is urging people to take advice by using the free The Pensions Advisory Service (TPAS), which is a free impartial advisory service.

25% of your pension pot will be tax free, with the balance taxed at your marginal rate of tax, so some careful tax planning is required. If you take a huge lump out that takes you into the 40% band or worse still, if the lump is over £150,000, 45% tax, you would lose a large percentage of investment your pot to the Treasury.

This could be a good thing for those of you looking to set up a new business though and looking for working capital to do so. Previously, if the funds were locked up, with the only option of buying an annuity, this was not an option, but this has now changed. It would be good if the government gave a tax break for this route, but I would imagine they would not have thought people would want to use their pension funds to set up a business. However, the way I see it is age 55 is no age at all and if you’ve always wanted to have your own business, why not?

The solution to facing a huge tax bill and losing a large percentage of your pension fund is to make smaller withdrawals over a number of years, which will avoid incurring higher rates of tax. Of course the rate of tax you pay will depend upon your other income in the tax year concerned, as the pension lump taken will always represent your top-slice of income and will be taxed accordingly.

Pension changes 2015 explained