Pension changes: What are they, how do I access my money – and is it tax free?

From today anyone aged over 55 is able to withdraw money from their pension – depending on a few factors

The new pension freedoms come into effect today, but what do they mean? (Getty Images)

The new pension freedoms, which allow those over 55 in certain circumstances to withdraw money from their pensions, comes into effect today. Simon Read walks through the changes, what they mean, and the mistakes to avoid.

What are the new pension freedoms?

From today anyone aged 55 or over will be allowed to take the cash out of their pension pot and do what they like with it. Or, to be strictly accurate, anyone with a defined contribution pension scheme may have the opportunity to get their cash if their pension provider has set up the necessary procedures.

Doesn’t my pension provider have to give me my money?

Not all pension companies, and not all pension schemes, will offer all the freedoms. Some may offer some options, while others may not offer any of the new flexibility to take your cash out. If that’s the case and you really want to get your cash, you may need to transfer your retirement savings to another company to access your pot. But you should be aware that if you do this there could be penalties, which would eat into your savings.

A cloud on the horizon of pensions freedom is the potential tax burden: some people will have tax deducted at an emergency rate

Hmm, doesn’t sound as easy as I expected.

It’s not. The City Watchdog is aware of the problems and admitted that, faced with “the most fundamental changes to pension policy we have seen in over a generation”, it will be forced to spend much of the next few months closely examining pension companies and how they deal with their customers. Financial Conduct Authority boss Martin Wheatley said: “We will be looking at how the market is working and how the industry is adapting to this change, and what it means for consumers.”

If I can get my cash, can I do whatever I like with it?

That’s the theory. But if you splash out on a holiday or fancy car, you could live to regret it.

But why shouldn’t I spend my money how I want?

Remind yourself why you built up the money in the first place. A pension is simply a planned savings scheme with a clearly defined aim: to ensure you have enough cash to last through your older years. If you take the cash and blow it, you won’t then have cash available to buy yourself an income for life. That could leave you living off the relatively meagre state pension. There are also massive tax implications.

Isn’t my pension cash tax-free?

Only a quarter of it, the rest attracts tax at your normal rate. That’s 40 per cent if you’re a higher rate taxpayer but even if you’re not, the money you draw will be added to your income and could very well push you into the 40 per cent tax bracket. There’s also the risk of being charged emergency tax on your cash, which could leave with the problem of trying to reclaim it from HMRC.

Pensions minister Steve Webb advises: 'Your first step should be to speak to Pension Wise [the government service] to understand the steps you need to take'

So what are my options?

The much-maligned annuities are becoming more attractive and could well be a good solution for you, providing as they do a guaranteed income for life. The unfair issue that an annuity died with the person is changing, and the annuities themselves are become more flexible – allowing you to alter them to meet your changing circumstances. You could avoid paying tax on your pension altogether by delaying taking it out until you stop working and then staging withdrawals so that you don’t fall foul of income tax demands.

It sounds very complicated.

It is, and that’s why it’s important not to rush a decision. Do so and you could end up making a costly mistake. The Pensions Minister Steve Webb pointed out last week that today is not a deadline, it’s just the start of the new freedoms. Delaying a decision until the autumn will give you more time to consider your options and, by then, there are likely to be many more options offered by different pension firms. However don’t think you have to take the retirement income solution offered by your own pension company. You could potentially do much better by switching companies.

What if I want advice now?

Go to the Government’s PensionWise service. Visit pensionwise.gov.uk or call 030 0330 1001, or contact Citizens Advice to arrange a face-to-face session.

What shouldn’t I do?

Fall victim to a pension scammer. Jamie Jenkins of Standard Life warns: “The biggest risk in the new pension freedoms is scammers. The worst thing that could happen to anyone under the new freedoms is that they take all their money out and hand it to someone who is scamming them.”

How can you spot the scammers?

They usually cold-call prospective victims. So if you get an unexpected call offering help with unlocking your pension, put the phone down!