Pension reforms

Recent pension reforms include changes to the state pension, the introduction of pension auto-enrolment, changes to tax liability when you pass on your pension when you die, and new pension freedom rules, which give you more choice over what you do with your pension money when you reach retirement.

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.

These are some of the major pension reforms that have been passed recently.

Recent pension reforms

Pension freedom

In the past, if you retired with a defined contribution pension you usually had to use it to buy a pension annuity, a product that guarantees you an income for the rest of your life.

Under pension reforms introduced by 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 £155.65 per week) 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 it’s being equalised 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 pension is held outside of your estate, meaning it’s not included in inheritance tax calculations and 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 1% of your ‘qualifying earnings’, while the minimum amount your employer has to pay is 1%, although these contribution levels are set to rise over the next few years.

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.

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Last edited: 08-03-2017

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