10 things you must know about pension freedom

Haarvey Jones

The UK pension system has just gone through its biggest shake-up in nearly 100 years, with Chancellor George Osborne liberating Britons from the obligation to buy an annuity at retirement.

Radical "pension freedom" reforms will change how we all plan for retirement and here are the key things you must know about the complex changes.

1. The over-55s are no longer obliged to buy an annuity with their workplace or personal pension, but can take the money as cash if they wish. New rules don't apply if you're under 55.

2.You cannot take your state pension as a cash lump sum, this will continue to be paid as before. Also excluded are “unfunded” public sector pension schemes covering the NHS, teachers, civil service, armed forces, police and fire-fighters. As are private sector final salary schemes (unless you exit your scheme altogether).

3. If you are one of the five million people who have already locked into a lifetime annuity you can't cash it in. But Mr Osborne has proposed changing that from April 2016.

4.Think twice before drawing all your pension as cash, because if you blow your pot you could live the rest of your life in poverty, and may even be denied some means-tested benefits.

5. You will pay income tax on any money you withdraw from your pension. This could deplete your savings, especially if a lump sum withdrawal lifts you into a higher tax bracket for that year. Better to spread the money out over many years.

6. Mr. Osborne has scrapped the pensions "death tax" which saw HM Revenue & Customs take 55% of any unused pension when you died. Now if you die before age 75 you can pass on any pension free of all tax, including inheritance tax. After 75, your beneficiaries will pay income tax on the money.

7. Income drawdown is set to soar in popularity. This involves leaving your pension invested to grow, while drawing regular income or lump sums. If your investments underperform, however, the value of your pension could fall.

8. Don't give up on annuities. Although the returns have been hit by falling interest rates, they are the only way of generating a guaranteed income that will last as long as you live, no matter how long you live. Worth considering for at least some of your pension.

9. Beware fraudsters, who are now circling in their thousands offering dodgy investment schemes to rip off people who have cashed in their pensions. Never invest in anything that sounds too good to be true, and only ever deal with Financial Conduct Authority regulated advisers.

10. These changes are complex, and if you can afford it, consider paying for independent financial advice. Otherwise you can get a free 45-minute consultation from the government-backed Pension Wise guidance service. Contact your local Citizens Advice Bureau for a face-to-face conversation, or call 030 0330 1001 for a telephone chat. Find out more at Pensionwise.gov.uk.