If the new British pension easy access rules were not complicated enough, the government has issued a new stack of guidance explaining three ways retirement savers can take their money.
From April 2015, the government is throwing away the old pension drawdown rules and replacing them with a new set that gives retirement savers more control over their cash.
Chancellor George Osborne and Pension Minister Steve Webb have scrapped the old method of drawing a 25% tax free lump sum and buying an annuity to provide a guaranteed income for life.
Instead, retirement savers can take their money from the age of 55 whether they are working or not and spend it how they like.
They still get the 25% tax free lump sum, but income tax is paid on the rest.
The three pension drawdown options
The latest guidance gives three ways to access the cash:
- Flexi-access drawdown – This lets retirement savers use their pension as a piggy-bank, letting them take what they want, when they want until the fund is empty
- Drawing a pension income – Instead of drawing the cash and going on a spending spree, retirement savers can take an income from their fund or buy an annuity to give a guaranteed lifetime income
- Uncrystallised pension fund – This is a new option that bridges a gap between the other options. This method lets retirement savers draw money from their fund but delay decisions about buying annuities or reinvesting.
An HM Revenue & Customs (HMRC) spokesman said: “From April 6, 2015, anyone accessing some or all of their pension savings without first designating funds as available for drawdown can have an uncrystallised funds pension lump sum.
“Normally 25% of the payment will be tax-free, with the remainder taxable as pension income. You cannot also have a pension commencement lump sum with an uncrystallised funds pension lump sum.”
How the options work
Industry experts consider the three options give sensible choices for savers making different decisions about their retirement.
Someone still in work might want to draw just part of their pension so they can reduce their hours, so they can take full advantage of the flexi-access drawdown.
However someone else might want to give up work completely and need an income from their cash, so they can take the second option.
Others may want to continue working full time but need some cash to pay down debts or feel they are not sure which option to take, so the uncrystallised fund is available to them.