Big changes afoot!
“People who have worked hard and saved all their lives should be free to choose what they do with their money”. George Osborne
This is one of the biggest shake ups in pensions for a very long time and will offer you a great deal more freedom when looking at income strategies in retirement and also the implications for your family on death.
To follow are the main changes and how we think they may affect you.
Flexible access to your pension fund from age 55
Most pension investors will have total freedom over how they access their pensions. You can choose to:-
- Take the whole fund as cash – 25% free of tax and the remainder taxed as earned income;
- Take smaller lump sums as when you like with 25% of each withdrawal free of tax and the remainder taxed as earned income;
- Take up to 25% free of tax and regular taxable income from the remainder of the fund – this can either be through income drawdown where the funds remains invested, or via a secure annuity which provides a guaranteed income for life.
Who is affected?
Anyone with a defined contribution pension – so a SIPP, personal or group personal pension, AVC etc.
This change will give you a great deal more freedom when looking at income strategies in retirement. It therefore becomes even more important to look at your overall situation as it may be that taking a pension income, as opposed to income from other sources may not be the most tax efficient strategy for you.
55% pension ‘death tax’ to be abolished
At present, the only way your pension can be passed on free of tax on death, is if you die before age 75 without taking any benefits. Otherwise, any lump sum which is paid from the fund is subject to a 55% tax charge, or taken as a taxable income.
From April 2015 this tax charge will be abolished and the tax treatment will depend on your age when you die.
- If you die before age 75, your beneficiaries can take the whole fund as a tax free lump sum or use it to provide a tax free income;
- If you die after age 75, there are 3 options:-
- Take the whole fund as cash less a 45% tax charge. It has been proposed that this should be changed to the beneficiaries rate of income tax from tax year 2016/17;
- Take a regular income taxed at the beneficiaries rate of income tax; or
- Take periodic lump sums through income drawdown and these will be taxed at the beneficiaries rate of income tax.
Who is affected?
Anyone with a defined contribution pension – so a SIPP, personal or group personal pension, AVC etc. Those who have an existing annuity will only be affected if they have chosen an option called Value Protection.
In addition, widening who can receive pension benefits is also very important – you can pass your benefits to your spouse, your children, anyone else you chose to nominate or a combination of all of these. And in turn, they can also pass on the benefits down the line.
Restrictions on how much you can contribute to private pensions
Pension contributions are still subject to a maximum annual allowance of £40,000 (or your current earnings – whichever is lower) however, if you make withdrawals from a pension in addition to any tax free cash taken, you could be restricted to a £10,000 annual contribution.
Who is affected?
Anyone who has a defined contribution pension and takes income from it after April 2015 could be affected but there are exceptions to this rule:-
- Your pension is worth £10,000 or less and you take it as a ‘small pot’. This can be done up to three times from a personal pension;
- You go into capped drawdown before April 2015 and your withdrawals after that remain within the current drawdown limit. If you are already in ‘flexible drawdown’ then you will be allowed to make contributions of £10,000 per annum (previously you could not make any contributions);
- You take your whole pension as a lifetime annuity or scheme pension.
The £10,000 limit does not apply to benefits within a Final Salary Scheme.
We feel that these changes are a really positive move and with careful planning your pension fund can continue to provide a benefit long after you have passed away. We will work with you to ensure that this happens in the most tax efficient way and we will be in touch directly if we believe this change will impact you personally.
If you have any questions, please do not hesitate to contact us.