The Government has confirmed that the radical changes to pensions first announced in the March 2014 Budget, have now been approved.
To help you understand what these changes mean and how you can make the most of the new opportunities that they create, we've summarised the details here.
Those primarily affected by the pension changes are people who:
Please be aware that this is based upon Prosperiment Ltd interpretation of the HM Treasury proposals.
Flexible access to pensions from age 55 – effective from April 2015
From April 2015, those of you who invest in pensions and who are 55 or over will have free rein in relation to how you choose to take an income from your pension (including, if you so wish, taking the whole pension fund as a lump sum).
Typically, the first 25% of the pension withdrawal will be tax-free. The remainder will be subject to income tax at your highest marginal rate – e.g. if you are a basic-rate taxpayer (20%), the income drawn from your pension will be added to any other income you receive (for example a salary), which could have the effect of moving you into the higher(40%) or top-rate (45%) income tax bracket.
It is of course possible to take your pension in stages, as opposed to one lump sum.
Although we cannot give tax advice, it is possible that using a phased process may help you with managing your tax liability.Equally, you should be able to take the tax free cash immediately, subject to the age limit of course, and defer taking pension income until a later date if you wish.
Restrictions on pension Income Drawdown abolished – effective from April 2015
An option available to those who invest in a pension is to, at retirement, take an income directly from their private pension fund. This process is called income drawdown.
Presently, the Government Actuary's Department (GAD) sets a maximum on how much can be drawn each year for those in capped Income Drawdown. This is commonly known as the GAD maximum.
April 2015 will see these limits abolished, meaning as a pension investor, you can take as much as you would like from your pension.
Income Drawdown allows you to invest your pension where you choose, subject to the Pension Provider's approval, and choose how much income you take. With this comes risk; for example it is possible that your fund may run out of money during your retirement.
Combinations such as poor investment performance and income withdrawals could see your fund reduce and, in the worst-case scenario, even run out of money.
It is important to point out that Income Drawdown is a higher risk option, especially when compared to say an annuity where the insurance company takes the risk.
With Income Drawdown, the responsibility to manage the fund and the income taken from it lies with you.
In addition to those groups outlined at the start of this document, if you are a pension investor in Income Drawdown prior to 6th April 2015, you will be able to move to the new unlimited regime; but you will be restricted on how much you can contribute to pensions in the future (the next section elaborates further on this).
New restrictions on contributions – effective from April 2015
If, in addition to any tax free cash, you choose to take any income from your pension after April 2015, under the new rules you may still be able to make pension contributions. However this would be up to a maximum of £10,000 a year (i.e. new reduced Annual Allowance). It's important to point out that employer contributions and pension benefits in Final Salary schemes would be included.
Two exceptions are:
Those of you who have protection may wish to consider the implications of making contributions on your protection status.
Investors already in Flexible Drawdown before April 2015 will be positively affected as they will be able to make contributions of up to £10,000 a year - whereas currently they are unable to make any contributions.
This will not affect you if you have not:
You will still be subject to the £40,000 annual allowance limit and current pension contribution rules.
Access to impartial guidance – effective for anyone taking retirement benefits after April 2015.
The Chancellor, George Osborne, announced in his budget speech that everyone should have free guidance on their retirement options.
Confirmation has now come that this will be provided by organisations such as The Pensions Advisory Service (TPAS) or the Money Advice Service (MAS), and will be delivered via face-to-face, telephone and web-based services.
Defined Benefit (DB) pension withdrawals – effective from April 2015
If you have with a Defined Benefit scheme you will be able to take advantage of the new rules and, should you choose to, make unlimited withdrawals. To enable this, you will have to transfer your Defined Benefit scheme into to a Defined Contribution pension (for example a SIPP).
Final salary benefits are very valuable and it is recommended that anyone considering this should first receive independent financial advice.For those clients in a public sector scheme it is important to point out that it will no longer be possible to transfer from most of these schemes.
Retirement Age increase – effective from April 2015
The age at which you can start to draw your pension will change to 57 in 2028, and then will increase in line with the State Pension age (i.e. remaining 10 years below the State Pension age).
This does not apply to Public Sector Pension Schemes for Firefighters, Police and Armed Forces.
Tax paid when you pass on your pension - reduced ?
– last quarter of 2014
If you die before:
Your entire pension fund can normally be paid to your beneficiaries free of a tax charge
However, If you are:
Any lump sum paid to your beneficiaries is currently taxed at 55%. Whilst this is still to be reviewed, the Chancellor believes this is too high and has stated that this will be reviewed later in 2014.