Your new options under the 2015 pension changes

There have been major changes to the rules which govern how you can use a pension to support you in retirement.


There's now a lot more choice around how you can draw your benefits from some pension schemes, but this means you'll need to weigh the options carefully to make sure you have the right arrangements in place. The government has recently launched Pension Wise to provide guidance on the new pension choices available.

Investing in a pension continues to benefit from tax relief, within Annual and Lifetime Allowances.

More ways to access an existing Defined Contribution pension

In the past, from age 55, individuals could draw up to 25% of a pension fund as a tax-free lump sum, and the remainder had to be used to provide a taxable income. For most people this meant using up a Defined Contribution pension fund (where you build up a pot to provide your benefits) to buy a secure income for life, usually in the form of an annuity.

Now, from age 55, individuals will be able to choose how they draw their Defined Contribution pension. Options might include:

  • Taking a lump sum – usually 25% of a pension fund can still be taken tax free –
    this can now be all at once, or in stages if your scheme offers this option

  • The remainder can be taken as taxable lump sums or income. Tax will be payable on any amount drawn in the year it is taken, so that total tax payable will depend on total income drawn in that year; higher rate or even additional rate tax could be payable

  • Unused pension funds can be left to nominated beneficiaries. (If you die after age 75, taxes may apply, depending on how your beneficiaries draw the benefits.)

Other key pension reforms:

  • State pensions are moving to a single flat rate pension in 2016

  • The minimum pension age (currently 55) will now be linked to State Pension Age, and will increase to 57 from 2028 (when State Pension Age will increase to 67) 

  • Most employers now have to automatically enrol their employees in a pension scheme and make employer contributions

Getting the best out of your pension

Although the restrictions have changed, pension providers aren't obliged to change their current offering under the new laws.

Check what options and benefits your provider offers; there may be guaranteed features and benefits which are worth staying for. On the other hand, it could be that you need to move your fund or leave your existing scheme to find the right solution for you. Bear in mind though, that there may be exit fees and set up charges to pay.

Keeping your pension tax-efficient

The April 2015 Budget announced a reduction in the Lifetime Allowance (currently £1.25 million) to £1 million in April 2016. Within the allowances, pensions continue to be a tax-efficient investment. 

For each contribution you make into a pension, your scheme can claim basic rate tax relief, and this is added to your pension fund. This means if you pay in £80, it can be boosted to £100 actually invested. 

There is an Annual Allowance (£40,000 or 100% of earnings if less in 2015-16) to limit annual tax relief, unless you have unused relief to carry forward. By keeping within the Annual and Lifetime Allowances, you can still invest large amounts tax-efficiently.

If you pay Higher or Additional rate tax, then you can show your pension contributions on your self-assessment tax return, to claim back tax. 

If your employer offers a pension scheme, they may be able to offer you a way to save both National Insurance and Income Tax; this is known as 'salary sacrifice'. 

Useful links to free & impartial advice:

Pension Wise has recently been launched by the government to provide guidance on pension choices at retirement.

The Money Advice Service can also help with understanding the options and lets you calculate your likely State Pension age.

A new, single-tier State Pension, will payable from April 2016.

The Department for Work and Pensions offers a Pension Tracing Service to help find all the pensions you have saved into over the years.


Making the right decisions

With most of us living much longer than in the past, our pension funds and other assets may have to last a long time. It’s vital to have all the information you need to ensure you make the right decisions about your future.

To see how Rafidain Bank could help you prepare for retirement, make an appointment to see one of our team of Financial Planning Managers. They will take the time to understand your financial situation, then give you clear, straightforward advice.

Or, if you are ready to take your pension benefits now, then the new Pension Wise service has been set up by the government to help you.

Find out more about our Financial Planning service