During the March 2014 budget the government introduced some radical changes to pensions in the UK
During the March 2014 budget the government introduced some radical changes to pensions in the UK. These changes have now been confirmed and further details have been provided by the government as at the end of September 2014. Here we will take a look at the changes imposed and how they will impact upon people dealing with their pensions in the UK as from April 2015.
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These changes apply to anyone over the age of 55 as at April 2015 and affect all types of pensions including individual or group pensions, stakeholder, SIPPs and some AVC schemes:
- From the age of 55 you are now allowed flexible access to your pension – there used to be limitations and restrictions on how you could take your pension but these have now been lifted. As from April 2015 you are able to take your pension income however you like, even taking the whole lump sum if this is your preference. This is then yours to save or spend. Do bear in mind that only the first 25% is tax free and you will be taxed on the balance. This sum will be added onto any other income you get so do watch out for it pushing you into the top 40% tax bracket or even 45%. Discuss this with your financial advisor and take his advice with regard to tax issues. He may suggest drawing down your pension in stages so as to avoid the higher tax penalties. There is nothing to stop you taking the tax free cash immediately and any balances at a later time.
- Drawdown restrictions (income from pension) – Limits are to be scrapped with regard to how much income can be taken from your pension fund. Previously this was limited. Now you can drawdown as much as you like. When you make use of this option your pension will remain invested. You decide how and when you want to take income from the fund. It is a very flexible scheme but you do have to plan it to ensure that you do not run out of money by taking too much out too soon. With the old system of putting this money into an Annuity, the insurance company took the risk as to how much money the fund would make. When you take the drawdown option, now you have to take the risk so it is up to you to ensure you have enough money. If the funds invested perform badly you may find yourself in a difficult situation with not enough cash left to cover your retirement. Again, discuss this with your financial advisor before you commit. He will be able to advise the safest and securest ways in which to proceed.
- Limits on how much you can put into your private pension pot – At the moment contributions are limited to £40k p.a. After April 2015 when withdrawals are made from the pension as well as tax free lump sums, contributions could be limited to £10k. This will apply to any pensions worth more than £10k with the exception of the following:
- A pension worth less than £10k where you take several small pots up to three times from a personal pension and unlimited times from an occupational pension.
- You enter into a capped drawdown prior to the date of April 2015. After that any withdrawals that you make will remain within your current limited drawdown, even if funds are moved around within the plan.
- Where you decide to take your pension as a lifetime annuity, the £10k p.a. limit will not apply to benefits being built up within a final salary pension. If you already entered into flexible drawdown before April 2015 then you will still be able to make contributions up to £10k p.a. (as opposed to current legislation which does not allow you to make any).
- Death Tax is being abolished – at the moment you can only pass on a pension as a tax free lump sum if you die prior to 75 years of age, provided you have not taken any lump sums or income. If this is not the case, 55% tax is charged. Under the new rules, no matter when you die, you can pass your pension on to any beneficiary tax free if they keep the funds in the pension scheme. When they withdraw money they will pay tax at the highest marginal rate applicable to them, if you die after the age of 75 years. This will mean that: a) any pension funds paid out from drawdown of after the age of 75 years will not be hit with 55% tax b) drawdown funds will be able to be paid to inheritors tax free when classed as a pension asset c) if the owner of the pension fund dies then income can be taken by any inheritor tax free.
- Impartial guidance and advice – the terms of the budget made it clear that anyone with a pension should have totally free access to impartial guidance and advice. This is to help pension holders make the best decisions when it comes to their pension and retirement. Advice will be available from April 2015 from TPAS (The Pensions Advisory Service) or MAS (Money Advice Service) free of charge via the internet, phone or through a meeting. Again, your financial advisor can tell you where to go for free and impartial advice.
- Defined benefit pension transfer – If you hold a final salary/defined benefit pension then you will be able to make as many withdrawals as you like if your transfer to a SIPP. However, this may cause you to lose out on benefits so do take advice before you commit to this. This new rule will apply to you from April 2015 as long as you have a defined benefit pension but it will not be possible to transfer from a public sector pension.
- Increase in retirement age – Under the old legislation you could withdraw your pension from the age of 55. Under the new rules this age will increase to 57 from 2028 and then keep in line with the rise in state pension age but always being 10 years below. This will not apply to you if you have a public sector pension and are in the Fire Service, Police or Armed Forces.
So, as you can see, there are major changes being made based upon the alterations made by the budget and the Bills that have since been published by the government. Because these changes are subject to interpretation it is always recommended that you take financial advice from someone that understands pensions. At any time, your personal circumstances or tax position may impact upon the way in which your pension plan is affected so any changes that you make should not be treated lightly.