Recent governments have made many pension reforms, trying to find ways to incentivise pension saving as people live longer and fewer employers offer the gold-plated defined benefit pensions of the past.
Here are some of the major pension reforms that have been passed in the last five years.
Recent pension reforms
- Pension freedom
Under pension reforms introduced by former Chancellor George Osborne, once you reach 55 you can now opt to take 25% out of your pension pot tax-free.
You can choose to withdraw this as a single lump sum, or take separate smaller amounts. You can then use the rest of the money as you wish, paying your marginal rate of income tax on any sum that you withdraw. You can also choose to buy an annuity.
- The new State Pension
There have been changes to the State Pension recently too. Previously, there was a two-tier system: the ‘basic State Pension’ and the ‘additional State Pension’. In April 2016, this system was scrapped and a single ‘new State Pension’ was introduced. You’re eligible for this if you have at least 10 years of National Insurance contributions (or credits), but you’re only eligible for the full amount (currently £168.60 per week for 2019/20) if you have made at least 35 years of National Insurance contributions.
The State Pension age (the age you’re eligible for your State Pension) is also changing, and is currently 65 for men and women. The plan is for it to keep increasing, and eventually it will be linked to life expectancy.
- Passing on your pension
The government has also reformed the way that pensions are treated for tax purposes when they’re passed on to an heir. Previously, inherited pensions were subject to hefty tax charges, but now if you die before 75, your beneficiaries can receive the money tax-free.
If you die when you’re older than 75, your beneficiaries will usually only need to pay tax on the money at their marginal rate of income tax. You can find out much more in our article about what happens to your pension when you die.
- Pensions Auto-Enrolment
Pension reforms have also affected employers’ obligations. Under Auto Enrolment rules, workplaces are now obliged to enrol eligible employees into a pension scheme, and to make contributions to their employees’ pensions.
The minimum employee contribution is currently set at 5% of ‘qualifying earnings’, while the minimum amount your employer has to pay is 3%.
Future pension reforms
Pension reforms will continue to take place, and future changes to the State Pension are likely, as well as possible changes to pension tax relief and Auto-Enrolment. It’s a good idea to keep abreast of pension news, as changes in legislation could make a big difference to your pension pot and your retirement.
Pension tax rules are particularly important, because the way pension contributions and withdrawals are taxed (or eligible for tax relief), can make a big difference to your savings and income.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 28-03-2019