Pension freedoms are a set of reforms to the UK pension system that were introduced in April 2015. These reforms give individuals greater choice and flexibility in how they can access their pension savings and use them to provide income in retirement.
Under the pension freedoms, individuals with defined contribution pension plans, such as personal pensions and self-invested personal pensions (SIPPs), are able to access their pension savings from the age of 55 (previously, most individuals were required to purchase an annuity with their pension savings or use them to provide a flexible income through an alternative income option such as drawdown).
The pension freedoms allow individuals to take their pension savings as a lump sum, to use them to purchase an annuity, or to leave their pension savings invested and draw an income from them through an income drawdown arrangement. The pension freedoms also allow individuals to take up to 25% of their pension savings as a tax-free lump sum and to use the remaining balance to provide an income in retirement.
They have given individuals more choice and control over their pension savings, but they have also brought new risks and considerations. It’s important for individuals to carefully consider their options and to seek financial advice before making any decisions about how to use their pension savings in retirement.
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