A very interesting article from the Daily Mail:

Pensioners will get a 25 per cent tax-free slice of multiple cash lump sums taken from their pension pots, under the latest sweeping change to retirement funding that was revealed today.

Savers will no longer get just one chance to take a single tax-free lump sum worth 25 per cent of their pension pots. Instead they will be able to dip into their pension when they like and get the first 25 per cent of all withdrawals tax-free with the remainder taxed as income.
The move is the latest part of the dramatic pensions freedom changes to the retirement landscape being made by the Government.
Savers will also no longer need to take out an annuity to provide retirement income when they die and the 55 per cent death tax on pension pots still invested has been axed.
We highlight the three big changes and what they mean to you.

The pension freedom revolution
The Government’s pension proposals which have been outlined in a series of announcements dating back to this year’s Budget are being outlined today in the Taxation on Pensions Bill put before Parliament today.
The changes affect those with defined contribution pensions, who need to turn their retirement pot into an income themselves, unlike those with final salary or defined benefit pensions who get a set income provided for them.
Restrictive rules on what they can do with their money have been torn up, along with the need for most to buy an annuity
Chancellor George Osborne said: ‘People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan.
‘From next year they’ll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax-free.’
People have been able to choose not to buy an annuity for some time, keeping their pensions invested and withdrawing money from them under a process called drawdown. Until the pensions freedom changes began, however, drawdown was a highly restrictive option for most people – this has now changed.

The big change – no more annuities
Pensions freedom hinges around savers no longer needing to use their defined contribution pension pots to buy an annuity, a product which typically provides them with an income for the rest of their life.
Instead they will be able to keep their pension invested and draw on it as needed.
Alternatively, they can cash in their entire pension – or take a series of lump sums out of it – and will be charged income tax on the amount at a level set by adding it to their standard income.
It was previously possible to keep your pension invested and use drawdown. Crucially, however, restrictive rules limited how much could be taken out each year for those who did not already have a substantial secure income of £20,000 from other sources.
This figure was reduced to £12,000 in March this year and more sweeping changes will come into force next April opening up drawdown to all, these were announced by George Osborne in his spring 2014 Budget.
That changed the pensions landscape, sent annuity sales diving, and secured the aim of shaking up the annuity market, which was considered to operate badly and offer poor value.
After Chancellor George Osborne revealed his plan to allow retirees to access their retirement pots as they wish, Pensions Minister Steve Webb was asked whether he was concerned people would blow the lot.
Referring to how the Coalition was delivering the new flat rate state pension, he said: ‘So actually, if people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice.’
The Government’s argument is that people can be trusted with their pension pots and that the changes will encourage saving.

Pensioners will get a 25 per cent tax-free slice of multiple cash lump sums taken from their pension pots, under the latest sweeping change to retirement funding that was revealed today.

Savers will no longer get just one chance to take a single tax-free lump sum worth 25 per cent of their pension pots. Instead they will be able to dip into their pension when they like and get the first 25 per cent of all withdrawals tax-free with the remainder taxed as income.

The move is the latest part of the dramatic pensions freedom changes to the retirement landscape being made by the Government.

Savers will also no longer need to take out an annuity to provide retirement income when they die and the 55 per cent death tax on pension pots still invested has been axed.

We highlight the three big changes and what they mean to you.

The pension freedom revolution

The Government’s pension proposals which have been outlined in a series of announcements dating back to this year’s Budget are being outlined today in the Taxation on Pensions Bill put before Parliament today.

The changes affect those with defined contribution pensions, who need to turn their retirement pot into an income themselves, unlike those with final salary or defined benefit pensions who get a set income provided for them.

Restrictive rules on what they can do with their money have been torn up, along with the need for most to buy an annuity

Chancellor George Osborne said: ‘People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan.

‘From next year they’ll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax-free.’

People have been able to choose not to buy an annuity for some time, keeping their pensions invested and withdrawing money from them under a process called drawdown. Until the pensions freedom changes began, however, drawdown was a highly restrictive option for most people – this has now changed.

Pensions freedom hinges around savers no longer needing to use their defined contribution pension pots to buy an annuity, a product which typically provides them with an income for the rest of their life.

Instead they will be able to keep their pension invested and draw on it as needed.

Alternatively, they can cash in their entire pension – or take a series of lump sums out of it – and will be charged income tax on the amount at a level set by adding it to their standard income.

It was previously possible to keep your pension invested and use drawdown. Crucially, however, restrictive rules limited how much could be taken out each year for those who did not already have a substantial secure income of £20,000 from other sources.

This figure was reduced to £12,000 in March this year and more sweeping changes will come into force next April opening up drawdown to all, these were announced by George Osborne in his spring 2014 Budget.

That changed the pensions landscape, sent annuity sales diving, and secured the aim of shaking up the annuity market, which was considered to operate badly and offer poor value.

After Chancellor George Osborne revealed his plan to allow retirees to access their retirement pots as they wish, Pensions Minister Steve Webb was asked whether he was concerned people would blow the lot.

Referring to how the Coalition was delivering the new flat rate state pension, he said: ‘So actually, if people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice.’

The Government’s argument is that people can be trusted with their pension pots and that the changes will encourage saving.

Multiple tax-free lump sums instead of a one-off opportunity

Pensioners will be able to tap into their pot and make multiple lump sum withdrawals and get the first 25 per cent of each tax-free.

This could be on big lump sums withdrawn, or on smaller regular sums taken out for retirement income.

Under the old rules you could have up to 25 per cent of your pension pot tax free but only by taking a single lump sum – delivering a use it, or lose it scenario.

The new option will work by people opting not to take an annuity or go into drawdown, but instead to keep their pension where it is and simply take chunks out of it – known as uncrystallised lump sums.

They will still be able to take their full 25 per cent lump sum in one go, if they either buy an annuity or go into drawdown, income then taken from this will be charged at income tax levels.

The choice on whether to take a 25 per cent lump sum traditionally left many people with a dilemma.

On one hand, the idea of a nice slab of tax-free money was highly appealing, on the other hand removing that amount from your pot left less retirement income, as there was less to spend on securing it.

Taking multiple lump sums and getting the first 25 per cent of each tax-free, removes the need for a one-off decision.

It also encourages people to keep their pension pot invested and growing rather than withdrawing money they may not need at that time.

Allowing a pension pot to grow and granting 25 per cent tax-free on all sums taken out, while taxing the rest as income, would also theoretically deliver more tax to the Government as it would be levied on a rising amount.

A saver with an £80,000 pension pot would previously have been able to take £20,000 as a tax-free lump sum and would typically use the rest to buy an annuity.

Now they could take £5,000 every two years, for example, and get £1,250 of each chunk tax free.

If they took £5,000 on retirement, the rest of their money could remain invested and hopefully growing in value until they opted to withdraw it.

Pass on your pension and the end of the 55% death tax

Pensions can now be passed on tax-free in some instances, or in others tax will only be paid at income tax levels by the beneficiary on money if they withdraw it.

Under the old rules pensions which were still invested could be passed on, but a 55% death tax applied.

Now retirement pots inherited from a pension holder who dies before age 75 will not be taxed.

A pension passed on after age 75 will not be taxed as long as the money remains invested.

The money will be taxed at income tax rates if the pension holder who dies is aged over 75 and the beneficiaries withdraw it.

This income tax rate will be decided by adding bequeathed money withdrawn to the person who inherits its normal income.

For example, someone who earns £30,000 a year, gets given £40,000 and withdraws it as income would not pay basic rate tax on it all, but 40% tax on the total sum above the higher rate tax threshold.

So what about final salary pensions?

The changes being made are aimed at defined contribution pensions, where people invest money and then use the pot they have built up to secure an income in retirement.

That income is dependent not only on how well their investments have done – and how much they have saved – but also the financial outlook when it comes to buying their pension income. Typically that was done by most people with defined contribution pensions through an annuity, which they bought from an insurer who would then give them a set income for life.

In contrast final salary schemes – and other types of defined benefit pension – provide you with a guaranteed income for life based on set criteria, for example 1/30th of your salary for every year you have worked for a company.

This means people are not dependent on the stock market’s performance, or annuity rates, and in the majority of cases a defined benefit pension ends up providing a higher income that is much more secure.

The key difference between defined benefit and defined contribution is that with the former you know in advance what you will get out, while with the latter you only know what you are putting in.

Those with final salary pensions can also take up to 25 per cent of what their pot is judged to be worth as a tax-free lump sum, although they will then get a lower retirement income to reflect this.

While most people retiring today still have some form of final salary pension, the high cost of providing them means they have been replaced in most workplaces with defined contribution pensions. Those saving into personal pensions also have defined contribution schemes.

It is possible to transfer from a final salary or other defined benefit pension to a defined contribution one, but experts caution that in most circumstances this is not a wise move.

Unfortunately, the annuity market has failed defined contribution pension savers in recent years. Many were not told they could get a better deal if they looked on the open market, rather than just taking their pension provider’s offer. Others were not informed that an illness or condition could get them a higher income, while complaints of people failing to understand their annuity would not pay out to a spouse on death also abound.

The problem was exacerbated by tumbling annuity rates, driven down by the ultra-low interest rate environment ushered in after the financial crisis and the role of quantitative easing in driving down Government bond yields, which influence annuity rates.

Is this actually going to work?

The pensions freedom changes are popular with savers and have been broadly welcomed by the industry for increasing flexibility and shaking up the annuity market.

The financial industry has sounded a number of warning notes on them, however.

Providers say that the pensions system is not set up to deal with the kind of flexibility that savers are being promised, especially once keeping tabs of many transactions and the tax implications are taken into account.

Some financial advisers also point out that annuities may still be the best option for many retirees and fear that their certainty will be shunned and savers will lose money on bad investments, or struggle to plan for the rest of their life