Budget 2014: Radical Pension Reform
In his 2014 Budget, the Chancellor of the Exchequer announced the most radical pension reforms in almost a century. Some of the changes are already in effect; others are proposed and subject to consultation before being introduced. In this blog, our pensions expert, Richard Smith, gives some guidance on what each of the changes might mean to you.
Proposed Changes from April 2015
The Government is conducting a consultation, ending on 11 June 2014, with the changes confirmed by 22 July 2014 and introduced from April 2015. The changes can be summarised as ‘Pension holders will be able to take the whole of their pension as a lump sum.’
At the moment, with one or two exceptions, pension holders who are 55+ are able to take a maximum of 25% of their pension as a tax-free lump sum but must invest the rest of their pension pot in an annuity to generate a taxable income for life.
From April 2015, the proposal is that from age 55, whatever the size of a person’s pension pot, they will be able to take 100% of it as a lump sum if they wish. The first 25% will be tax free, the rest will be taxed as income. (People who continue to want the security of an annuity will still be able to purchase one but it will not be compulsory.)
Changes already in effect from 27 March 2014
1. More flexibility for people with small pension pots
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. Note that you can only do this once.
If you are aged 60 or over and have any personal pension pots smaller than £10k, you can take them as lump sums, regardless of your total pension wealth. You can do this three times – i.e. for up to three small pension pots.
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 to make unlimited and uncapped withdrawals from their pension pot. However, until recently you had to have a secure pension income of £20k a year (including state pension) before you were allowed to access flexible drawdown. That changed on 27 March 2014 to £12k a year (including state pension). Could you now be eligible for flexible drawdown?
Could you benefit? The Government estimates that the changes that came into effect on 27 March 2014 will mean that around 400,000 more people will have more flexible pension options in this financial year 2014-15.
From April 2015, the 320,000 people who retire each year with defined contribution pensions will have complete choice over how they access their pension.
Could you be one of them? To find out more, contact your independent pensions advisor, Richard Smith, on 01243 532635 or firstname.lastname@example.org