The new pension rules explained

26 January 2015 ( 23 April 2015 )

New rules about pensions came into effect on 6 April, providing more choice for anyone who has a private or occupational money-purchase pension.

Withdrawing cash from your pension

As of 6 April, you can withdraw some or all of the money held in a money-purchase workplace or personal pension. This is providing you are over the age of 55 and have not already begun to draw on your pension or bought an annuity.

While you can still convert your pension into an annuity or invest it in a drawdown product, the new rules also enable you to withdraw the entirety of your pension, either as a lump sum or a series of withdrawals, subject to income tax above the first 25%.

However, bear in mind if you withdraw too much from your pension in one go, it could tip you into a higher income tax bracket. For example, let’s say your pension is worth £100,000 and you choose to take the whole lot as a lump sum to spend or invest as you wish. The first £25,000 would be tax-free, while the remaining £75,000 would be treated as income for that tax year, pushing you into the higher-rate tax band for the year.

Confused by pensions? Read our guide to the different types available. 

Free guidance

Withdrawing money from your pension is not a decision to be taken lightly. Any withdrawals will reduce the amount of money you will have at your disposal to fund your retirement. This is one reason pension holders will have access to free impartial guidance provided by the Pensions Advisory Service and other organisations.

The end of ‘death tax’

Under the old rules, the pension fund of anyone who died attracted death tax at a rate of 55%. Under the new rules, no tax will be imposed, providing the deceased passes away before turning 75.

The beneficiaries of a pension holder who dies after the age of 75 can draw money from the fund, which will be treated as income and taxed accordingly. Alternatively, they can take the pension fund as a lump sum.

This used to be taxed at a flat rate of 55%. However, lump sum withdrawals will now be taxed at 45%, with the intention to change this to  the beneficiaries’ marginal rate (the highest rate of income tax applicable) by 2016-17.  

Transferring pensions after death

In addition to the abolition of death tax, anyone who dies before the age of 75 can pass their joint life or guaranteed term annuity to a surviving spouse or civil partner tax-free. This income used to be taxed at the beneficiary's marginal tax rate. It is also now possible for someone other than a spouse or financial dependant to receive the payments from such a plan.

Can you inherit a private pension?

The flat-rate State pension

Looking further ahead, a new flat-rate State pension will be introduced to replace the basic and additional pensions for people reaching State pension age from 6 April 2016. Although the government has not confirmed what this will be, it is widely reckoned to be around £155 a week for those who have made the required National Insurance contributions.

The flat-rate pension is being brought in to simplify the current, relatively-complex system. It’s also intended to be fairer to groups who have traditionally lost out – including women who tend to receive a lower State pension than men.

Are you one of the women disadvantaged by the changes to the state pension?

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.