George Osborne’s changes to how people can manage their retirement pot begin next month. These are some of the myths about it.
There is just over a month to go before the new pension freedoms are introduced. Those with defined contribution pension schemes, also known as money purchase plans, will be able to dip into their retirement savings or blow the entire pot from the age of 55.
The scale of the changes, announced less than a year ago, has left many people confused. We tackle 10 myths about what the freedoms mean for you.
1. Insurers will let me use my pension like a bank account from April
There’s nothing in the pension legislation forcing insurers to apply the new rules to existing policies. Indeed, some insurers, particularly those that are no longer interested in attracting new customers, may not offer any of the pension freedoms at all, while others simply have not been able to update their systems in time. As a result, 6 April could be a bit of an anti-climax.
Alan Higham, retirement director at Fidelity, the investment firm, said: “Your pension scheme or company can stick to the original deal of offering you just an annuity. You may well have to move to a new pension provider if you want to access your savings earlier.”
And bear in mind that transferring between providers is not always a quick process. You could have to wait a few weeks, or even a few months, to dip into your pot.
2. I can cash in my pension pot tax-free
There are growing fears that pensioners do not realise that only 25% of your pot is available to be taken tax-free. The rest will be taxed as income as it’s withdrawn from your pot, incurring rates of 20%, 40% or even 45%. Crucially, this means taking out a large amount of your pension – or even cashing in the whole pot – to pay for a home extension or a new property could push you into one of these higher tax brackets, resulting in a large tax bill.