Pension cash changes come into force

Elderly couple Image copyright Thinkstock

Sweeping changes to pension rules which will give savers much more control over their money have come into force.

The shake-up is one of the coalition government's biggest reforms, allowing people who have saved for a pension to do what they want with their money.

It means people who are retiring no longer have to buy an annuity to provide a fixed, regular income.

The changes were announced by Chancellor George Osborne in his March 2014 Budget.

Until now those who were retiring could cash in up to 25% of their pension pot as a tax-free lump sum.

They then had two options: reinvest their pension pot - or keep their current investments - and take an income from their funds as they needed. The second option open to them was to take out an annuity, which provided a fixed, regular income in their retirement.

The changes that have now come into force mean those due to retire now can do whatever they like with 100% of their pension pot, for example invest in property, although crucially they will still only receive the first 25% tax free.

The reforms have been welcomed in principle, but pensions experts have raised concerns about how they will operate in practice.

Many pension companies have said they are not yet ready to allow people to cash in their pensions because it brings extra costs to schemes as well as risk.

More than half of workplace pension schemes are still undecided about whether to offer access to the new freedoms, and 15% say they definitely will not, according to pension consultants Xafinity.

Pension changes 2015

Image copyright Thinkstock
  • People aged 55 and over can withdraw any amount from a Defined Contribution (DC) scheme, subject to income tax
  • Tax changes make it easier to pass pension savings on to descendants
  • Many people with Defined Benefits (DB) schemes will be allowed to transfer to DC plans
  • All retirees will have access to free guidance from the government's Pension Wise service
  • Existing annuity holders unaffected for the time being, but there are plans for them to be able to sell their annuity

The government has promised impartial advice sessions on the reforms.

'Completely wrong'

But despite government assurances that they will be ready for "pensions freedom day", some pensions industry experts have voiced concerns.

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Media captionPensions Minister Stephen Webb: "There is no mad rush. This is a big decision and it's worth getting it right"

There have also been claims that not all of the advisers needed have been recruited yet.

But Pensions Minister Steve Webb dismissed as "completely wrong" claims that two million people would immediately be looking to take advantage of the new rules.

He added there were hundreds of people specially trained to give advice - 300 at the Department for Work and Pensions and more at Citizens Advice Bureaux and the Pensions Advisory Service.

Cashing in

Image caption Mr Gunn's local church will benefit from his pension pot

A 57-year-old man from a Devon village has emerged as one of the first people to cash in their pension under the government's reforms.

Michael Gunn, a retired chartered accountant, wants to spend some of it on a new roof for the church hall.

But in defiance of experts, he also wants to use the money for a transatlantic cruise.

Mr Gunn was not prepared to say how much he would be taking out of his pension pot, but he has taken care to heed warnings about tax bills.

"What I like about this is that you are totally in charge of how much tax you are exposed to - to stay within a lower tax band," he said.

He told BBC Radio 4's Today programme: "There are plenty of people to give advice… we are confident the capacity is in place".

He also dismissed concerns about pensioners running out of money early, as has happened in Australia.

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Media captionShadow work and pensions minister Greg McClymont: "We do have concerns about the speed at which these changes are being brought in"

He said the government's new flat rate pension would act "as a floor to fall back on."

He also argued that more people would save more money for retirement because the new pension provisions were "more attractive and more flexible".

'Emergency tax'

Last week, the Institute for Fiscal Studies (IFS) warned that thousands of people withdrawing money might find themselves paying much more tax than they needed to.

Other experts have pointed out that, in any case, people taking out cash will have to pay what is called "emergency tax".

Unless individuals can show a P45 tax form, HM Revenue and Customs (HMRC) will treat any payments as if they are a new monthly salary.

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Media captionHow pension rules are changing

In other words, they will charge tax on the basis that the new income is repeated every month for a year.

So anyone cashing in a pension of £18,000 - assuming nothing is taken tax-free- would be charged an immediate tax bill of £6,592.

Those in that position will have to reclaim the tax using forms P50 or P53.

However HMRC has promised they will get the money back within a month.

Pension advice

Meanwhile, hundreds of staff from Citizens Advice - and Citizens Advice Scotland - are preparing to offer free face-to-face interviews with anyone who needs help, from Tuesday.

Those aged 55 or over can go to one of 500 offices in England and Wales, or 90 in Scotland. Those living in very remote areas of Scotland can arrange home visits.

But customers will only receive "guidance", not advice.

"What we don't do is provide any details of which companies people can go to for pensions - or which particular products," said Richard Chilton, one of those who will be conducting the interviews.

"But we provide guidance on what the options are," he said.

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