In his 2014 Budget, Chancellor George Osborne announced a set of radical pension reforms, some of which are already in effect. Others are due to come into force in April 2015, having been confirmed in the Taxation of Pensions Bill published on 14 October 2014. But what do the changes mean to you?
Changes already in effect
1. More flexibility for people with small pension pots
a. If you are aged 60 or over, the maximum amount of your overall pension wealth you can take as a lump sum has increased from £18k to £30k.
b. If you are aged 60 or over and have any personal pension pots smaller than £10k, you can take up to three of them as lump sums.
2. New higher income drawdown limits
The maximum amount you can take out each year from a capped drawdown arrangement has increased from 120% to 150% of an income based on Government calculations, as long as you start the drawdown arrangement after 27 March 2014.
3. Flexible drawdown accessible to more people
Flexible drawdown allows pension holders who have a secure pension income of £12,000 a year (including state pension) to make unlimited and uncapped withdrawals from their pension pot.
Changes from April 2015
These changes can be summarised as ‘Pension holders will be able to take the whole of their pension as a lump sum.’
1. Freedom to draw down cash
From April 2015, if you are 55 and have a defined contribution pension, you can either take 25% of your pension tax-free in one lump sum or have 25% of any withdrawals made tax free. So, if you had a pension worth £100,000 you could either:
a. Take £25,000 tax-free in one lump sum, with any subsequent drawdowns taxed as income
b. Make a series of withdrawals when convenient to you and receive 25% of each drawdown tax free
The second option could be useful to help you manage your tax liability (not available when buying an annuity with the pension fund).
2. Flexible access to pensions from age 55
From April 2015 pension investors aged at least 55 will have flexibility on how they draw an income from their pension, over and above drawing down the tax-free lump sum/s. They can:
a. Take the whole fund as cash in one go
b. Take smaller lump sums, as and when they like
c. Take a regular income via income drawdown – where they draw directly from the pension fund, which remains invested
d. Take a regular income via an annuity – where they receive a guaranteed income for life but lose their pension capital.
Any withdrawals over and above the tax-free amount will be taxed as income at your marginal rate. So, if you are a basic-rate (20%) taxpayer, any income you draw from your pension will be added to any other income you receive (e.g. your salary) and this could push you into the 40% or even 45% bracket. It is therefore essential to take independent pensions advice.
3. 55% pension ‘death tax’ to be abolished
Currently, it is only possible to pass a pension on as a tax-free lump sum if you die before age 75 and you have not taken any tax-free cash or income. Otherwise, any lump sum paid from the fund is subject to a 55% tax charge.
From April 2015 this tax charge will be abolished. The tax treatment of any pension you pass on will depend on your age when you die.
If you die before age 75, your beneficiaries can take the whole pension fund as a lump sum or draw an income from it tax free, when using income drawdown. Dependants can also choose to buy an annuity, in which case the income will be taxed.
If you die after age 75, your beneficiaries have three options:
a. Take the whole fund as cash in one go: the pension fund will be subject to 45% tax (current proposal).
b. Take a regular income through income drawdown or an annuity: the income will be subject to income tax at your beneficiary’s marginal rate.
c. Take lump sums through income drawdown: the lump sum payments will be treated as income, so subject to income tax at your beneficiary’s marginal rate.
4. Transferring a ‘final salary’ scheme
Anyone with a non public sector ‘final salary’ pension scheme will be able to transfer the benefits to a defined contribution scheme (e.g. a SIPP) and then take advantage of the flexibility of the new rules. However, some benefits of the final salary scheme may be lost and independent pensions advice should be taken.
5. Retirement age set to increase
The minimum age at which you can draw your pension is currently 55. This will rise in 2028 to 57 and then rise in line with any rise in the state pension age, normally remaining 10 years below the state pension age.
Could you benefit?
To find out more, contact your independent pensions advisor, Richard Smith, on 01243 532635 or firstname.lastname@example.org