What is pension freedom?
It means you can withdraw up to 25% of your defined contribution pension tax free when you reach 55*.
You cannot use pension freedom with a defined benefit pension and not all companies offer for their defined contribution pensions, so check before you withdraw.
What are your options?
When you reach your pension freedom age, you can:
Withdraw a 25% tax free lump sum and take an income from the rest
Make several withdrawals; the first 25% will be tax free, and get the rest as an income
Withdraw it all; the first 25% is tax free, the remaining 75% is taxed
If you make a large withdrawal from your pension, you could force yourself into a higher income tax band depending on the amount you withdraw
What tax will you pay?
If you are a basic rate taxpayer (20%) and your withdrawal pushes you into the higher rate or additional rate tax band, then you will have 40% or 45% tax deducted instead.
To avoid this, take smaller withdrawals that keep you in your existing tax band.
What are the drawbacks?
Annual allowance reduction: Your annual allowance drops from £40,000 a year to £10,000 once you make your first withdrawal.
Think about this if you want to keep contributing to your pension after making a withdrawal.
You could run out of money: If you withdraw and spend your entire pension fund, you have to rely on the state for an income for the rest of your retirement.
Think about how important your pension income is to you and whether you need a lump sum withdrawal.
Remember, you can withdraw 25% of your pension tax free and use the rest as an income.
From April 2017, if you have an annuity and want to take the money out, you will have new tax freedom to do so.
Your annuity money will be liable for income tax at your normal rate if you withdraw, which is an improvement on the current tax charges between 55% and 70%.
If you do not have an annuity, you can find out more about them here.