The most radical changes to pensions in almost a century

The government has announced the most radical changes to pensions in almost a century. The Chancellor initially proposed the changes in his March Budget but the Government confirmed them and provided further details on 21st July 2014.

So, how will these changes affect you?

Flexible access to pensions from age 55

What is changing: With effect from April 2015 pension investors, who have reached a minimum age of 55, will have total freedom over how they take their pension income enabling them to spend, invest or save it as they so wish. They could even take the whole fund as a lump sum if they want to. Of course, as per the pre-existing rules, the first 25% will be tax free with the remainder being subject to income tax at the highest marginal rate.

Therefore, if you are a basic-rate (20%) taxpayer, you will need to consider that any income drawn from a pension will be added to any other income you receive (such as salary or investment income) which could place you into the higher (40%) or possibly the top-rate (45%) income tax bracket. To counter this you could choose to take the pension in stages rather than in one go, in order to help you manage your tax liability. It will also be possible to take the tax-free cash first and then the taxable income at a later date.

Who will be affected: Those with a defined contribution pension (such as individual or group personal or stakeholder pensions), self invested personal pensions (SIPPs) and some Additional Voluntary Contribution (AVC) schemes, etc could benefit.

Pension investors aged 55 or over from April 2015 should be able to utilise the increased flexibility straightaway.

When this is happening: April 2015

Pension income (drawdown) restrictions to be abolished

What is changing: Currently investors have the option to draw an income upon retirement directly from their private pension fund, known as income drawdown. There are however limits on how much most people can draw per year, known as the Government Actuary’s Department (GAD) maximum. In April 2015 these limits will be scrapped and pension investors will be able to draw as much or as little income as they so wish.

An advantage of using income drawdown is that your pension fund remains invested and under your control. You can choose where to invest and how much income to take. It means you can keep your options open and be flexible as to when you take an income and when it is passed on to your heirs. It is important to note however that with this increased flexibility comes a very real risk of running out of money in retirement. It is very much a higher-risk option because the responsibility lies with you, unlike a secure income (annuity) where the insurance company takes that risk. Taking too much income, as well as poor investment performance will reduce your income, and could mean that at worst your income will run out.

Who will be affected: Those with a defined contribution pension (such as individual or group personal or stakeholder pensions), self invested personal pensions (SIPPs) and some Additional Voluntary Contribution (AVC) schemes, etc could benefit.

Pension investors aged 55 or over from April 2015 should be able to utilise the increased flexibility straightaway.

For those already in income drawdown prior to 6 April 2015 it will be possible to move to the new unlimited regime (i.e. draw more income than the current GAD maximum). However restrictions will apply on how much can be contributed to pensions in future (see change 3 below).

When this is happening: April 2015

New restrictions on how much you can contribute

What is changing: From April 2015 if you take an income from your pension (on top of any tax-free cash), you may still be able to contribute to a pension, but only up to a maximum of £10,000 a year. This figure includes employer contributions and any pension benefits being built up in final salary schemes, which can be decidedly large.

There are however two exceptions to this rule:

• If your pension is worth less than £10,000, you will be allowed to make withdrawals from three small personal pots and unlimited small occupational pots, as long as they are worth less than £10,000 each, without being subject to the new £10,000 allowance.
• If you go into capped drawdown before April 2015 and your withdrawals after April 2015 remain within your drawdown limit, the new £10,000 allowance will not apply. This will stop people from having their salary paid directly into a pension and then receiving 25% tax free, therefore avoiding national insurance on employment income.

Who will be affected: Those with a defined contribution pension (such as individual or group personal or stakeholder pensions), self invested personal pensions (SIPPs) and some Additional Voluntary Contribution (AVC) schemes, etc – worth more than £10,000 and taking income from it after April 2015 will be affected.

Those already in flexible drawdown before April 2015 will be able to make contributions up to a maximum of £10,000 per annum where previously they have not been allowed to make any contributions whatsoever.

This will not affect you if you buy an annuity or have not started drawing your pension yet. The annual allowance of £40,000 and current pension contribution rules however will still apply to you.

When this is happening: April 2015

Transferring a defined benefit pension (i.e. final salary)

What is changing: Anyone with a defined benefit pension, such as final salary, will be able to make unlimited withdrawals and take advantage of the new rules. However, in order to facilitate this, you will need to transfer to a defined contribution pension such as a personal pension plan or a SIPP. You will also need to receive Financial Advice first to prevent the loss of very valuable benefits that may exist in your defined benefit pension.

Who will be affected: Those with a defined benefit pension who want to take advantage of the increased flexibility from April 2015. It will no longer be possible to transfer from most public sector pension schemes.

When this is happening: April 2015

Retirement ages to increase

What is changing: Presently, the earliest you may draw your pension is age 55 but this is set to increase. It will rise to 57 in 2028 and thereafter increase in line with the rise in the State Pension age. However, it will continue to remain 10 years below the State Pension age and will not apply to Public Sector Pension Schemes for Fire Fighters, Police and Armed Forces.

When this is happening: April 2015

Possible fall in the tax paid when you pass on your pension

What is changing: In March 2014, George Osborne (Chancellor) vowed to revisit the issue of tax paid on pension lump sums upon death. Presently, if a pension investor is in drawdown, or 75 or older, any lump sum paid to beneficiaries is taxed at 55%.

The Chancellor has not reviewed it yet but still believes this tax is too high and has therefore promised a review later in 2014.

Please note that if you were to die before you go into income drawdown, purchased an annuity and before the age of 75, your entire pension fund could normally be paid to your beneficiaries tax free.

When this is happening: Last quarter of 2014

Any questions?

For further information please speak to us today.

The information above does not constitute advice or a recommendation and you should not make any decisions on the basis of it.