New pension

There was a great deal of publicity about Pensions Freedoms when they were introduced in April 2015, writes Alistair Lauchlan, a financial planner with Verus.

Individuals now have much greater flexibility with how they choose to hold and draw pension benefits.

Broadly speaking, pensions are either Defined Benefit (DB) schemes or Defined Contribution (DC) schemes.

DB schemes pay a guaranteed each year, usually related to final average salary in employment.

This pension, once in payment, usually rise in line with inflation.

With a DB scheme, all of the risks lie with the employer and scheme provider – the pension will be paid each year, no matter how long you live.

A Defined Contribution scheme is effectively a pot of money belonging an individual.

There is the option to buy an annuity (a guaranteed income for life) with this pot.

Alternatively, an individual when the pension is taken.

In this case, the associated risks lie with the pension holder – the money may run out before you die.

However, there is much greater flexibility in when and how you take cash.

Individuals can access can pension pension or will to control the benefits likely to 1972). There are a number of options. When cash is withdrawn from a pension, usually 25% is tax free and remaining 75% is taxed as income.

The new freedoms allow an individual to withdraw the whole pot at once.

However, this is likely to trigger a tax bill.

Professional advice can be helpful to avoid paying more tax than you should. from age 55 (although this is increase for people born after the large

The new schemes.

This has increased the attractiveness for some of transferring out of a DB scheme.

The advantage is that the individual can control when and how the income drawn.

For example, if there are plans early retirement such as upgrading a house, or going on a special holiday, more funds can be taken at that point.

In general, discretionary flexibilities only relate to DC spending is in