Pension reforms set to take effect


Published: Monday 6th April 2015 by The News Editor

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More than half a million older savers will be handed radical new freedoms from today as the start of a new “21st century pensions system” gets under way.

People aged 55 and over will be handed new powers to make one of the most important decisions of their lives – what to do with retirement savings that they have spent decades building up.

Older savers will no longer be required to use their pension pot to buy an annuity when they come to retire. Instead, they can access their pots how they wish, subject to their marginal rate of income tax. They could take their pot in one go, or use it like a bank account and withdraw cash in slices.

The new freedoms will apply to the 320,000 people who retire each year with a defined contribution (DC) pension.

Around 540,000 people will be able to take control of their savings from today, according to estimates from the Government. The reforms were unveiled in last year’s Budget, so many people have been delaying their pension decisions until now.

Property investing, holidays, using the money to help family members and reinvesting the money with financial firms are some of the ways that people could use their cash.

But experts said that for many people, the best option will be to resist making an immediate dash for their cash. They urged people to take time to carefully weigh up their options.

Concerns have also been raised about the potential pitfalls of the new freedoms and that some people may fall prey to pension scams, or run out of money too early, or not realise the tax implications of withdrawing money from their pots.

Most pension savers who will have access to new retirement freedoms support the changes – but also fear there could be drawbacks – according to a study from the National Association of Pension Funds (NAPF).

Some 63% of 850 pension savers aged between 55 and 70 said the reforms are a good idea but there may be some downsides.

Research by PwC has also raised concerns that many people approaching retirement say they are yet to be contacted by their pension provider about the new pension freedom options.

PwC said its findings suggest that either people have not been contacted, or the messages from providers have not hit home and people have dismissed them as irrelevant.

It said many pension providers are likely to have a large inflow of customer requests to deal with as the reforms get under way.

The Government’s free, impartial Pension Wise service will offer guidance to everyone eligible for the freedoms.

Ros Altmann, the Government’s business champion for older workers, said the move heralds the “start of a 21st century pension system, not a 20th century system where the pensions industry and the Government knows best” about what people should do with their money.

Pensions minister Steve Webb said: “It is right that people should have the power to make their own decisions about how they spend their own money after decades of careful saving – ending the effective obligation to buy an annuity will give people back control of their financial affairs.”

Mr Webb has said that people should be trusted with their own pension pots, but also has acknowledged that someone will “blow the lot and wish they hadn’t”.

He has said he is “relaxed” about the possibility of people spending their savings on a Lamborghini sports car.

David Smith, financial planning director at Tilney Bestinvest, predicted the vast majority of savers will carefully consider their options before deciding what to do.

He said: “People who have saved diligently across their lives for the moment of retirement do not transform into reckless hedonists at the point of retirement.”

Louise Hanson, director of advocacy at the Association of British Insurers said: “Don’t panic, don’t rush and don’t be tempted to dash for the cash. April 6 is the start of a new pensions era and not a deadline to act.

“The only sensible advice is to take time to fully consider your options and contact the free, impartial Pension Wise service.”

Laith Khalaf, a senior analyst at Hargreaves Lansdown, also reminded people to consider the tax implications of withdrawing large amounts of cash over a short time period.

Mr Khalaf said: “If you’re a basic rate taxpayer who has built up a relatively large pension (and you cash it in), you could end up paying a higher rate of tax.”

The Government’s reforms to encourage retirement saving also mean that people will be able to pass their unused DC pension funds to a nominated beneficiary when they die. Many people have previously faced a 55% pension death tax.

Workers saving into a pension will also be given stronger protections from high charges for managing their pots, with the introduction of a 0.75% charge cap.

Consumer group Which? has a guide to help people prepare for their Pension Wise session at

Which? executive director Richard Lloyd said that while people will have more freedom and choice over their hard-earned pension savings ” this is an extremely complex decision and one they can’t afford to get wrong”.

Published: Monday 6th April 2015 by The News Editor

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