Important Information on Pension Changes and Flexibility
In the March 2014 Budget, the government announced radical changes concerning how individuals can draw their pension benefit. Once the announcement was made, the next stage was consultation with many interested parties and groups, and the response to that consultation was released this week. The main body of that response is outlined below, but please note that this does NOT apply to the State Pension Scheme.
As from April 2015, pension investors aged at least 55 will have more choice over how they receive income from their defined contribution pension (for example, personal pensions). You can even take the whole pension plan as a lump sum if desired. The first 25% of the value of the pension fund will be tax free and the rest will be subject to income tax at your highest marginal rate. Depending on your other income, this could push you into the higher rate (40%) or top-rate (45%) income tax bracket. You can control your tax liability to a certain extent by taking the pension out in stages, rather than all in one go, or you could receive the tax free lump sum while you are earning from employment and then receive the rest when you stop working.
Currently the most used methods of taking pension benefits are either buying an annuity or Income Drawdown. Income drawdown involves taking a regular income from your pension fund. It is important to have a suitable investment strategy otherwise your pension fund could be eroded during your lifetime. There are currently limits on how much you can draw each year (capped drawdown) but these limits will be scrapped from April 2015 and any amount of income can be taken each year thereafter.
If you are currently using Income Drawdown and you wish to use this new flexibility you will be able to from April 2015.
The downside to this new relaxation is that once you use the new flexibility, you will be restricted as to how much you can contribute into a pension plan each year. This limit is known as the Annual Allowance and it is normally £40,000. Those using the new flexibility will have a reduced allowance of £10,000 per annum. This includes employer contributions into pension schemes and benefits being built up in final salary pension schemes. There are 2 exceptions to this:
If you start capped drawdown before April 2015 and your withdrawals after April 2015 remain within your drawdown limit, you will not be subject to the new £10,000 Annual Allowance.
If your pension is worth less than £10,000 you will be able to receive the whole fund as a lump sum (part taxed and part tax free) without being subject to the new £10,000 Annual Allowance. You can receive up to 3 pension pots in this manner.
This is important to those with pension plans worth, perhaps £30,000 or so, who wish to ‘cash in’ their pension plan from April 2015 onwards, but are still members of their employer’s company pension scheme or have employer contributions into a personal pension. Employer contributions into final salary pension schemes can easily exceed the £10,000 Annual Allowance and would result in you bearing a tax charge on the excessive pension contribution.
The government also wish to ensure that everyone has free impartial guidance concerning their pension benefits and currently intends to make this available via organisations such as The Pensions Advisory Service or the Money Advice Service. This will not be advice and you can consult an adviser of your choosing rather than using the free guidance.
Those in funded final salary schemes will be able to transfer to take advantage of the new rules BUT only if they have taken advice from an FCA regulated adviser first. The existing ban on transfers once benefits are in payment will continue and members of unfunded (public sector) final salary schemes will not be able to transfer.
The minimum age from which you can draw benefits will be increased from 55 to 57 from 2028 and from then on it will increase in line with the rise in the State Pension Age. The aim is that the minimum age will be 10 years below the State Pension Age. This will not apply to public sector schemes for firefighters, police and the Armed Forces.
Finally, the current rules allow for your residual Income Drawdown fund to be inherited on your death as a lump sum, but subject to a tax charge of 55%. This is still under review and it is expected that the amount of tax charge will reduce, but no further information is available.
The end result? How and when to take pension benefits has often been a complex situation, particularly for those with larger pension funds and other sources of income (such as rental income). This new flexibility – whilst very welcome – adds to the complexity, and means professional advice will almost certainly be needed. For some, this will mean joint input from your financial adviser and your tax adviser. robinson+co and robinson+co Financial Services Ltd are in an ideal position to provide a comprehensive assessment of the most suitable strategies.