MONEY
A BRIGHTER FUTURE? George Osborne’s pension reforms in last year’s Budget were seen as a vote-winner, but how they will actually work in practice has confused even professional investors. Neal Underwood sheds some much-needed light on the subject.
G
eorge Osborne shook up the pensions system in the March 2014 Budget with wide-reaching reforms that promise retirees far more freedom in what they can do with their pension pot. Prior to the changes, savers were able to take 25 per cent of their pension in a tax-free lump sum, with the rest typically used to buy an annuity to provide them with an income. But from April 2015, savers over the age of 55 in a defined contribution pension scheme will have the option of taking a number of smaller lump sums. In each case, 25 per cent of the sum will be tax-free. The main beneficiaries are likely to be people with a relatively large pension pot, who can use the new freedom to avoid paying 40 per cent tax when they draw it down. The changes effectively mean a pension can be used like a bank account, with the money saved sitting in a pension pot for the individual to access whenever they want from the age of 55, subject to marginal tax rates.
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