New pension rules: don’t forget about tax

by Paul Northmore, Managing Director

The new pension rules announced last year come into effect on 6th April 2015 – “Freedom Day”.  

From that date, if you are 55 or over you can withdraw your entire ‘defined contribution’ pension pot as a cash lump sum if you wish.  (‘Defined contribution’ means how much you receive depends on what you’ve paid in.) 

Many are tempted by the new freedom.  A recent survey by The Pension Advisory Service and TD Direct Investing indicated that 24% were planning to take at least half of their pension pot as cash. 

But there are some important tax considerations.

The new tax rules for pensions

75% of each lump sum you withdraw is subject to tax – and your pension pot withdrawals are classed as ‘income’ and taxed by the same rules.  This means:

Should you cash-in your final salary pension?

By Patrick Goddard, Independent Financial Adviser

If you have a final salary pension scheme, many people may be rather envious!  These schemes, which usually pay a proportion of your salary at the time you retire, are now few and far between.  

Final salary schemes are a type of pension known as ‘defined benefit’ – no matter how the markets perform, you know how much you’re going to get when you retire.  

But most schemes now are ‘defined contribution’ schemes – the only certainty is how much gets paid into the scheme, not what your payout may be.

The certainty of a final salary scheme is what’s so appealing.  So who would give that up?

Well, with the pension reforms which come into effect in April 2015, everyone has considerably more freedom in how to use their pension fund – whether it’s a defined benefit or defined contribution scheme.