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Insight & Opinion

What will pension reforms mean for the UK?

Author: Gemma

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Pensions have been going through a period of reformation for some time now, with the government’s auto-enrolment being rolled out earlier this year having been one of the largest changes seen in many years.

In less than four months, further pension reforms, described by some as ‘radical’ will come into force across the UK. But what will these mean for people across the country?

The biggest change for savers over the age of 55 is that from April they will be able to take a number of small lump sums from their pension savings (of which 25 per cent will be tax free). This widely anticipated reform replaces the older system in which pensioners who took a single large lump sum were generally having to buy an annuity with the rest of their money.

So who benefits? The main benefactors will be people who have large pension pots saved up, because they will generally be able to pay less tax than they would have before. According to the Guardian, those who take their pension in lump sums will be able to avoid paying 40 per cent tax.

For example, anyone with a £200,000 pot can accept their money as four lump sums of £50,000. Under the reformed rules, they would only need to pay income tax on £37,500 of this per year, receiving £12,500 tax free. Over four years, this would mean paying just £22,000 rather than more than £50,000 in tax.

For those on a smaller tax pot – for example £40,000 – the benefits will be less prominent, but there can still be some. For example, if they defer their state pension for a number of years and take their pot in four lump sums of £10,000 then personal allowance will kick in thanks to the 25 per cent tax-free rule, meaning they effectively have access to the money tax free.

The best way to take advantage of the reforms as a whole for older people, according to the Guardian, is to slowly take money out of a pension pot to make sure they don’t get hit by hard tax, as well as making use of the £15,000 ISA allowance to make the most of their money.

However, if you are considering this, remember that there are still exceptions. While you don’t strictly need to be retired under these new rules to take money out of your pension fund, you do need to be older than 55. Anyone younger than this will be subject to the older rules and will still pay tax as they would have done in the past, leaving them with less in their pocket.

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