You have to work hard to build up savings in pension plans.
The UK Government believes it is only right that you have the freedom to choose how and when you access your money in retirement.
The current system restricts choice and has resulted in about three-quarters of retirees purchasing an annuity – a fixed income for life.
Annuities will remain right for some but flexibility will be welcomed by many.
From April 2015, you will have full flexibility at retirement if you have a defined contribution pension scheme.
In the meantime, some interim changes have been made.
Small pots – if you have more than one pension and one is £10,000 or less (increased from £2,000), you can take that pension as cash. The number of pots you can treat in this way has increased from two to three.
Trivial commutation – if you have total pension savings of less than £30,000, you can take it all as cash. This has been increased from £18,000.
To take advantage of small pots or trivial commutation you must be over 60. The first 25% is tax free, with the balance taxed at your marginal rate. You could have pension pots eligible under both rules.
Capped drawdown – this allows you to take income directly from your pension pot. The maximum you can withdraw each year is 150% of an equivalent annuity (it was 120%).
Flexible drawdown – there is no limit on the amount you can draw from your pension pot each year, but you must have a guaranteed annual income of more than £12,000 in retirement (it was £20,000).
Income rules and restrictions on capped and flexible drawdown will disappear from next April. From age 55 you will be able to take your money with much greater flexibility.
You will still be able to take the first 25% tax free, with the balance taxed at your marginal rate. The big difference will be that you can take out as much of your money as you want and when you want.
Your pension pot will become a tax privileged bank account for your retirement.
It is vital that your savings are looked after prudently and that you understand any risks involved.
This flexibility will require professional advice to ensure that your objectives are met in the most tax-efficient and suitable manner for you.
Frank Fraser is a financial planner in the Elgin office of Johnston Carmichael Wealth. He can be contacted on 01343 548646.