Government extends pension cooling-off period

The government has announced yesterday that people who have recently taken a tax-free lump sum from their defined contribution pension will be given 18 months rather than 6 months to decide what they wish to do with the rest of their retirement savings, and will not be put at a disadvantage should they wish to wait to access their pension savings more flexibly.

This follows an announcement on 27 March that confirmed that the government would take action to ensure that people do not lose their right to a tax-free lump sum if they would rather use the new flexibility this year or next, instead of buying a lifetime annuity.

Under current tax rules, once a tax free lump sum has been taken, individuals have six months before they are required to make a decision regarding their pension, either by buying an annuity or entering into capped drawdown.

Currently, if this is not done, the lump sum is then taxed at 55%. This extra time will allow people to make the right decision for their pension.

Exchequer Secretary to the Treasury, David Gauke, said:

"At Budget the government announced the most fundamental change in the way that people access their pension in almost a century, ensuring that over 400,000 people who have worked and saved hard will be able to access their retirement savings more flexibly.

"However, we recognise that decisions people take regarding their pensions are important and take time. This extension to the decision making period will give people the opportunity to take full advantage of the new flexibilities introduced at the budget."

The Chancellor announced at Budget that by removing the effective requirement to buy an annuity, people will have greater flexibility in accessing their pensions.

This means that people can choose how they access their defined contribution pension savings; for example they could take all their pension savings as a lump sum, draw them down over time, or buy an annuity.