Pension changes April 2015: The five things you need to know
Monday 6 April brings not just an Easter Monday sugar come down, but huge changes to the way pensions work.
The shake-up will give greater power to savers over how they can use their pension money. Here are the five things you need to know.
1. The changes
Those with a defined contribution pension heading towards retirement will now be able to take their whole pension pot as a lump sum rather than buying an annuity which pays out an income over time. This means there are a whole host of options for those aged over 55 to invest this cash. Some people with a defined benefit pension will also be able to swap this for a defined contribution scheme to take advantage of these new freedoms.
2. Lamborghini time?
Some may wish to splash out all their cash on a Lamborghini, as one minister famously said. But, anyone who's been prudently saving for their future over the course of their working life is unlikely to see this as a sensible option. Indeed, research from prudential suggests just two per cent of people are even considering blowing their pension pot on purchases.
3. Risks
Other than the unlikely blowout on a Lamborghini, there are other risks to be aware of. One think tank has warned that people may not buy the right pension product that will serve them properly throughout their whole retirement, while others may be susceptible to fraudsters. A group of leading MPs have called for a new regulator to specifically oversee the new pensions market to protect pensioners.
4. Tax
The first 25 per cent of the pension lump sum, or smaller amounts, are tax free. Anything over this will be taxed at normal income rates along with any other earnings from elsewhere. If this totals more than £42,386, then this could take you into the higher 40 per cent tax bracket. Another think tank has warned people to be careful of this potential tax trap.
5. Guidance
The government is offering guidance on pension changes and retirement options through the Pension Wise scheme, though it will not be advice on specific products or technical advice.
The service, launched just two weeks before the changes come in, has received less promotion than may normally be expected for such a major shake-up due to the rules of "purdah" during the run up to the General Election.
While the changes do come into effect on Monday, those heading into retirement do not have to make a decision straight away on which option they will go for, and many may still stick with an annuity.