Pension freedom starts on Thursday!

While most savers will have to wait a year before they can get access to their whole pension pots, a series of restrictions will be loosened this week to give people more flexibility over this retirement incomes

Rules on drawdown products and small pension pots will change from Thursday, and NMTBP looks at what to expect, and which providers are ready for the changes

What’s changing?

Income drawdown

Income drawdown products allow you to take an income directly from your pension pot, which remains invested so it can grow further and last longer into your retirement. The amount you can withdraw as income is capped based on the Government Actuary Department (GAD) rate, which is a similar level to annuity rates

Currently, drawdown customers can take an income that is 120 per cent of the GAD rate. However, from Thursday, this will rise to 150 per cent, boosting incomes albeit at the expense of depleting your pension pot more quickly

Of course, you don’t have to take the maximum amount, you can lower the amount you take when you have your reviews to ensure your pot can last longer

Some companies, including Standard Life, have reduced the minimum pot size a person needs to enter income drawdown to £30,000 to give an option for people to access their pension now rather than waiting until they get full access next year

Flexible drawdown

This product works in the way the Government wants all pensions to work from next year, in that you can take as much as you want from your pension pot as and when they choose. However to qualify, you must prove you have £20,000 per year in other guaranteed income in retirement that will allow you to take your cash as and when you want. This could come from the state pension, an annuity bought with another pension pot, or a defined benefits pension

From Thursday, the minimum income limit to start flexible drawdown falls to £12,000

Small pension pots

Currently people aged over 60 in possession of pension pots worth less than £2,000 can take them as a cash lump sum

From Thursday, this will rise to £10,000

In addition, people who are over 60-years-old whose total pension savings are worth less than £30,000 will be able to take all of their savings as a lump sum from Thursday, of which 25 per cent will be tax-free, with the rest taxed at marginal rates

This is currently limited to people with total pension wealth of less than £18,000

How can you change your drawdown amounts?

Income drawdown plans are subject to reviews so that people can change the amount they are taking from their pension pot

These reviews are held every three years, so existing customers who want to take advantage of the new 150 per cent GAD rate will have to wait for their next review date

However, you can request an emergency review to be held on the anniversary of taking out your drawdown plan, whether through your provider or your financial adviser - though some people whose plans started in March will have to wait almost a year before they can trigger their review

Provided that the company you’re applying to is ready, new customers will be able to take advantage of the new rules on capped and flexible drawdown from this Thursday

Which companies will be ready?

Major providers that have confirmed they will offer enhanced GAD rates and lower the restrictions for flexible drawdown from Thursday include:

Legal & General


Hargreaves Lansdown


Scottish Life


Standard Life

Other major providers Aegon and Aviva have not yet revealed whether or not they will be ready for the changes.

How do you take small pensions pot as cash?

If you have total pension savings of less than £30,000 and are aged over 60, you can take this as a lump sum from Thursday. This is known as trivial commutation

If you haven’t started taking an income from the pots, then only 75 per cent of the lump sum will be taxed. If you have started taking the pension before turning it into a lump sum, then the whole of the lump sum will be taxed. All withdrawals will be taxed at the 20 per cent basic rate

You must have had your pension pots valued at least three months before you decide to take the lump sum

To get the ball rolling you must contact your various pension scheme administrator and fill out an application to withdraw your savings, which will include a disclaimer that states your total pension wealth is below £30,000

You should get valuations from any other pension pot providers you have so you can prove the sum of your savings

If you’ve built up several different pots from within the same pension scheme (say, if you have a local government pension but have moved between employers), then you must take all of these pots at once, you can’t take some and leave the others. You can do this though if the pots are held within different schemes

You must however take all of your lump sums within a year of making your first withdrawal, otherwise you’ll be hit with a tax charge

It’s important to make sure you haven’t got any pension pots you’ve forgotten about or that may be worth more than you think, because if it turns out you have more than £30,000 in savings, your lump sum will be treated as an unauthorised payment by HMRC and you’ll get hit with a 55 per cent tax charge

If you have a defined benefit pension, then the value of your pot is the promised pension multiplied by 20, so if you were due £1,000-a-year, then the value would be £20,000, plus any lump sum also promised. In any case, you should contact your administrator for a valuation

You should bear in mind any income you’ve already taken during the tax year, such as from your salary, to make sure that when you take your lump sum you don’t stray into a higher rate of taxation, which could mean you end up paying 40 or 45 per cent tax on a portion of your lump sum

As all lump sums are taxed at 20 per cent via Pay As Your Earn, anyone who exceeds the 40p or 45p rate will have to pay any additional tax they incur on their lump sum via a self-assessment return. This includes those already paying the 40p or 45p tax rate

If you wish to take a lump sum from a workplace pension pot worth less than £10,000, you can’t have transferred any funds out of the pension scheme in the last three years, and you can’t be a controlling director, or connected to the controlling director, of the employer running the pension scheme

If you have a personal pension worth less than £10,000, you can take all of this as a lump sum, a quarter of which is tax-free. If you have several personal pension pots, you will only be allowed to take a pot as a lump sum on three occasions

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