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How Pensions Work
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The rules on how you can use the money saved in a ‘money purchase’ pension were relaxed in April 2015 and it is even more important that you think carefully, and in advance, how your pension savings can provide a source of income in retirement.
The government’s 'freedom and choice in pensions' changes to tax rules allowed people to cash in their defined contribution savings from the age of 55 in all circumstances, subject to their marginal rate of income tax (what is due to be paid on any additional taxable income earned) rather than the previous 55% charge for full withdrawal. The tax-free lump sum continues to be available.
People who want the security of an annuity providing an income until death can still purchase one, and many do. But they are also free to extract all their pension savings in a lump sum, or purchase a drawdown product to keep their money invested and access it over time. These changes bring with them the risk of people being left without a regular income that lasts as long as they live, and leave them vulnerable to pensions scams and high charges.
There was an accompanying guarantee that individuals approaching retirement would receive free and impartial face-to-face guidance (now provided by the government-backed Pension Wise service) and that pension providers and schemes should also guarantee to provide guidance.
The TUC is very critical of these changes, describing them as an "ill-thought experiment with Britain’s pensions pots" and has called for a thorough review. "Savers must have access to good value, high quality retirement income options, not simply to be left alone to fend for themselves in a free-for-all."
The Pensions Advisory Service has summed up the changes and says there are six options available including, leaving the pension pot untouched, purchasing an annuity, getting an adjustable income (Flexi Access Drawdown), taking cash in chunks (Uncrystallised Funds Pension Lump Sum), cashing in the whole pot in one go and mixing any of the options.