Muras Matters: April 2015 Pensions Freedom

April 2015 Pensions Freedom

April 2015 will herald the biggest shake up for a generation on how pension income can be taken.

There’s a common misconception amongst the general public that, come 6 April, they can access the new ‘freedom & choice’ with their pension. Many will be disappointed as there’s no obligation for every pension scheme to offer the new freedoms. In order to take advantage, some scheme members will have to transfer to a flexible Defined Contribution pension.

Defined Contribution Schemes

Broadly, where contributions to a pension scheme are set but the income from the fund is variable depending on the value of the fund, this is known as a defined contribution (“DC”) scheme.

From 6 April 2015, members of a DC scheme aged 55 or over can withdraw as much as they choose and pay income tax at their marginal rate. This can be beneficial where, for example, a higher rate (40%) income tax payer has decided to retire early, their income falls the following tax year after retirement into the basic rate (20%) band.

Members of a DC scheme are entitled to free, impartial advice through Pension Wise, who were created by the Government.

Defined Benefit Schemes

In broad terms, a defined benefit pension scheme is where the income from the pension fund is not variable and contributions to it are changed to compensate for any shortfall.

Members of defined benefit (“DB”) schemes will have to transfer their fund to a DC scheme to take advantage of this flexibility. DB scheme members transferring values over £30,000 will have to prove they have taken independent financial advice. DB schemes are usually very valuable therefore it would be very rare for transfers like this to be worthwhile.

For both schemes, the minimum age will rise in line with the State Pension age therefore in 2028 it will rise from 55 to 57 as the State Pension age rises to 67.

This is very much a broad overview of a complex topic. We strongly recommend taking advice from a qualified independent financial adviser before deciding to withdraw any of your pension fund. If you want any further information regarding the pension changes please call your normal contact at the firm who will be able to put you in touch with a suitable advisor.

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