The UK government is changing the way people fund for their retirement by reforming its pension schemes. It affects not only pensioners, but also the human resources and payroll department of many employers. This isn’t something that anybody can learn overnight, so many find it beneficial to look for an automatic pension scheme enrolment to make the process easier.
The Types of Pension Schemes
1. Final-Salary Scheme – Also known as defined benefit scheme, this guaranteed pension depends on your earnings at the end of your career and your length of service.
2. Career Average Scheme – Another guaranteed pension scheme, which depends on your average pay over your entire career.
3. Defined Contribution Scheme – This uses your contributions and investment returns as a basis, but can be smaller than a final-salary scheme.
What the Pension Changes Could Mean for Retirees
An announcement during the chancellor’s budget revealed that retirees would have better access to their pension pots early next year. The government is removing all access restrictions, allowing retirees to use their entire funds as they wish. This new rule will take full effect on April 6, 2015, but there are existing rules that are already adjusting since March 27, 2014.
How Do the New Pension Schemes Work?
Those who have a total pension savings of £30,000 can take their cash in full (trivial commutation) and face taxes at marginal rates. People with bigger amounts, on the other hand, can take up to three pensions worth £10,000 instead of two worth £2,000. For those who use an income drawdown, can take even a bigger amount. Unlimited withdrawals through a flexible drawdown are also possible if the retiree has at least £12,000 of secured pension income.
The reformation of pension schemes maybe complex, but don’t let this confuse you. All you have to do is find more information and ask someone who can better explain things to you.