1. ITV Report

Explained: How pension changes affect you

From 6 April, there will be there will be a major change in the way that defined contribution pensions - the most popular private pension schemes in Britain - are accessed.

The reforms see a removal of all previous tax restrictions on how people with these schemes can access their pension pots.

How things worked before

This is how the pension system has worked for people with defined these schemes up until now:

People with pension pots between £18,000 and £310,000 are often pushed into choosing annuities. Credit: HM Treasury

At present, people with pension pots between £18,000 and £310,000 have been constrained in the choices they have had for access to their retirement savings.

  • Pension savings under £18,000

As the diagram shows, those with pension savings below the lower threshold (£18,000) have been allowed to withdraw all of the money without paying any tax beyond their marginal rate (eg, 20% for basic rate taxpayers or 40% for higher rate taxpayers).

  • Pension savings over £310,000

Those with pension pots above the higher threshold (£310,000) also had flexibility, because they had the flexibility to draw down their pension - in other words, to take as much from it as they wanted on an annual basis.

  • Pension savings between £18,000 and £310,000

However, those in the middle have often been forced into buying annuities as a result of tax restrictions (a 55% rate of tax for withdrawing more than a quarter as a lump sum or for breaching the drawdown limits).

What is an annuity?

An annuity is a scheme that pays out regular income based on the amount of your pension savings. Using this system hasn't been great for everyone as annuity rates have been low for some time.

So not only was the system a little complicated, but it has also been seen as unfair on those who've felt pushed into choosing an annuity, which may not be the most financially beneficial way of using their money.

The new system from 6 April 2015

Here is a diagram showing how the new system will work for everyone:

In the new system, the 55% tax rate is removed - meaning no restrictions on how a pension can be taken. Credit: HM Treasury

As you can see, the proposed new system is quite a bit simpler.

At the point of retirement, pensioners can now access their retirement savings however they wish - whether through full withdrawal, an annuity or drawdown - without the threat of a 55% tax rate.


So, for example, if you have a pension pot of £200,000 on retirement, you could take £50,000 tax-free as a lump sum, use another £50,000 to get a regular income through an annuity, and then drawdown as much as you wish or need from the remaining amount each year to supplement your income.

Guaranteed free, impartial advice

In addition to the above, there will also be a guarantee, enforced by law, that anyone reaching retirement age will be offered free, impartial, face-to-face advice on how to make the choices that are best for them.

Warnings over the new rules

With the greater freedom allowed to pension savers also comes greater responsibility for managing their finances sensibly.

In particular, the ability to withdraw huge lump sums from retirement savings has prompted warnings that some people will run them down "in days and months, rather than years".

There have also been warnings that pensioners could be drawn toward scams and lose their entire life savings at the hands of fraudsters.

Read more:

More on this story