pension law

How New Pension Laws Will Affect You

It’s rare for a budget to pass without bringing a new raft of changes to the way pensioners can dispose of their money. This is because the treasury is constantly trying to perform a careful balancing act in economically testing times.

A few decades back, the pension-claiming population was dwarfed by the working population, but with children of the post-war baby boom collecting their pensions and those born in a time of lower birth rates contributing the bulk of tax, the population time bomb that’s been muttered about for the last thirty years is beginning to materialise.

What Are the Main Changes in the New Pension Laws?

The biggest headline change in the last couple of years is what the government referred to as ‘pension freedoms’. This affects defined contribution schemes and has advantages and drawbacks for those reaching pension age. Hitherto, your pension pot has always been used to buy an annuity when you reach retirement age. This is where you effectively buy yourself an annual income for the rest of your life. The level of this income is largely dependent on the amount of money you’ve squirrelled away into your pension pot.

Under the new rules, it’s no longer necessary to buy an annuity. Instead of doing this, you’ll be able to draw down your savings. That is, take all, or some of that money out and spend it on something you want. This is great news for anyone with multiple, large, pension pots, but it comes fraught with risk too. Many will be tempted to spend their pension pot in the short term, then struggle on with the state pension for the remainder of their lives.

Defined Benefit or Defined Contribution?

These changes affect those with defined contribution (DC) pension schemes, but there will also be an option for those on defined benefit (DB) schemes to change to DC if their employer allows it. Before doing so, you need to consider whether this is the best thing for you. DB schemes usually come with a measure of inflation proofing and the ability to pass on some of your income to your spouse. They also have advantages if your pension pot is running close to the maximum level.

Passing It On

However, these new rules have major implications for those who wish to pass on their pension pot to their children. Under the new rules, those who die before the age of 75 can pass on the whole of their pension pot tax-free. After 75, they’ll have to pay 45% tax on the pot if they claim it as a lump sum. This is reduced from 55%. Naturally, this will have considerable implications for those making a will or seeking probate.

Where Can I Find Out More?

Naturally, none of this is simple and it’s always good to get legal advice. Come and talk to us at Mark Reynolds Solicitors and we’ll guide you through the implications for your will and probate, as well as other legal implication of the new rules.