Guide To Pension Freedoms

In March 2014, George Osborne, the then Chancellor of the Exchequer, announced a revolutionary pension system reform. This reform was designed to empower people, giving them greater control and flexibility in accessing their pension savings. The new pension freedoms took full effect on 6 April 2015, opening up a world of new possibilities for retirees and individuals approaching retirement.

The main new feature, Flexi-Access, is a term used to describe the freedom for those aged over 55 to access their pension income without having to purchase an annuity. Instead, they can choose to enter drawdown or take a cash amount. This change has brought about much greater flexibility around how you benefit from Money Purchase Pension (Defined Contribution) schemes, including Self-Invested Personal Pensions (SIPPs).

The pension system reform, introduced by the UK government, was a significant change that gave people more control over their pension savings. It was seen as a ‘genius move’ by some, as it increased the government’s popularity and initially led to a rise in taxes collected from the member’s income tax and the VAT collected on their spending.

The famously quoted pensions minister at the time, Steve Webb, said: “If people do get a Lamborghini and end up on the state pension, the state is much less concerned about that, and that is their choice.”

Even more interesting for expatriates is that some can withdraw all their money in one go and pay zero tax, alleviating their entire Pension from future income tax.

Several variables include:

– A Persons age

– Their Country of Residence

– Their Type of Pension

– How Long they have been Outside the UK

Since the rules governing how pensions can be taken have been dramatically relaxed, more people are using pension freedoms to access their retirement savings.

Pension freedoms have given retirees considerable flexibility over how they draw income or withdraw lump sums from their accumulated retirement savings. They have undoubtedly been hugely popular.

1.Receive a guaranteed income (annuity)

Receive a guaranteed income (annuity)

When an individual retires, some or all their pension savings can be used to purchase an annuity from an insurance company. This annuity then pays out regular, guaranteed payments for the rest of the retiree’s life or a specified period, depending on the terms of the annuity.

The key benefits of using an annuity within a pension include:

Income Security: Provides a predictable and stable income, helping retirees manage their expenses without worrying about market fluctuations.

Longevity Protection: Ensures that retirees do not outlive their retirement savings by providing lifelong income.

Investment Management: Shifts the responsibility of managing investments from retirees to insurance companies.

Overall, annuities within pensions offer financial peace of mind and security in retirement.

2.Receive an adjustable income (Flexi-access drawdown)

Flexi-access drawdown is a feature of UK pensions that allows individuals to access their pension savings flexibly after age 55. Under this arrangement, pension holders can:

Withdraw Lump Sums: Employees can withdraw portions of their pension savings as needed, with 25% of each withdrawal typically tax-free and the remaining 75% taxed as income.

Adjust Income: You can choose the amount and frequency of withdrawals, allowing for customised income based on your personal financial needs and circumstances.

Investment Control: Keep the remaining pension funds invested, with the potential for growth and associated investment risks.

Flexi-access drawdown provides greater flexibility and control over how and when retirees use their pension savings compared to traditional annuities or fixed-income arrangements.

3.Leave your pension pot untouched

It’s up to you when you take your money. You might have reached the normal retirement date under the scheme or received a pack from your pension provider, but that doesn’t mean you have to take the money now.

If you delay taking your Pension until later, your pot grows tax-free, potentially providing more income once you access it. Pensions are not part of the member’s estate so that they can be effective IHT planning tools

4.Cash in your whole pot in one go

If you choose to cash in your whole pension pot in one go, there are certain things you need to think about. This option can have clear tax implications. For example, taking your whole pot as cash could mean you end up with a large tax bill. For most people, using one of the other options will be more tax efficient. It’s also important to note that cashing in your pension pot will not provide you with a secure retirement income.

Checklist for pension freedom with zero tax:

You need to have been out of the UK or intend to stay outside the UK for five complete tax years
Your Pension needs to have Flexi access (SIPP or QROP)
You must be over 55
The country you live in must have a 0% income tax on foreign pensions
The country in which your Pension is located must have a tax treaty with the country in which you live.

The main two pension jurisdictions that make a 100% tax-free withdrawal possible are the UK (SIPP) and Malta (QROPS). Some of the countries you would need to be a resident to make this possible would-be Saudi Arabia, Qatar, the UAE, Oman (Malta only), and Malaysia (SIPP only). Australia is also an option but a little trickier.

Generally, the UK and Malta’s tax treaties only grant taxing rights to countries with an income tax system. It’s rare for either jurisdiction to grant taxing rights to a country with a zero-income tax regime. If you are over 55, living in the GCC, and have pensions, exploring your options is wise.

Your Financial situation at retirement.

Your retirement financial situation will likely determine how you draw income from your Pension. For example, if you are still paying your mortgage or have any other debts, you may require a lump sum and then an income stream.

While an annuity can offer you the security of a guaranteed regular income, a drawdown plan allows you to grow your Pension and overall wealth during retirement. The latter route will likely suit those with a higher risk appetite, as any significant market swings could cause severe damage to your pension savings.

THINK CAREFULLY BEFORE MAKING ANY CHOICES

Pension flexibility may have given retirees more options. Still, they’re also very complicated, and you must think carefully before making any choices you can’t undo in the future. Withdrawing unsustainable sums from your pensions could also dramatically increase the risk of running out of money in retirement.

It’s crucial to remember that pension decisions are complex and can have significant financial implications. An experienced pensions adviser can help you navigate these complexities, map out your financial future, and advise on how best to use your pensions to get the most out of them with the least amount of tax. Seeking professional advice is a wise step to ensure you make informed decisions and feel supported in your retirement planning.

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