The government is set to allow savers to treat their pensions ‘like bank accounts’ and take their tax-free lump sum whenever and in as many withdrawals as they like.
Currently the government has a restriction in place which requires a pension’s tax-free lump sum to be paid within 18 months of the member becoming eligible for their pension income, which has meant the amount has to be paid in one lump sum.
However, according to the Daily Telegraph, Chancellor of the Exchequer George Osborne has announced that from April 2015, individuals will be able to access ‘as much or as little’ of their tax-free lump sum as they want.
But are the ‘new changes’ really new changes, or just ‘tweaks’?
The ability to take to tax free cash in bite-size chunks has been around for quite some time and is known as ‘drawdown’ and can be achieved through effective retirement planning. The only slight change is from April 2015, with the removal of the 18 month time limit on how to take benefits. At present this limit comes into force after some pension income has been accessed.
The changes may mean people could take a portion of their 25% tax free cash and leave the remainder of their fund invested. This remaining fund could lead to a potentially higher amount of tax free cash being received if the fund achieves investment growth.
On the other hand, if the fund falls there could potentially be less tax free cash than what could have been first obtained at the outset.
The government has yet to provide proper consultation on the finer details of this new change.
However, Mr Osborne is quoted in the Telegraph: “People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan. From next year they’ll be able to access as much or as little ahead of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax free.
‘For some people an annuity will be the right choice whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown. We’ve extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum.”