Some of you may recall in the March 2014 Budget speech that the Chancellor of the Exchequer George Osborne, announced his ‘once in a generation changes’ to pension savings – new pension freedoms. This will affect the way in which individuals from the age of 55 with defined contribution pension schemes may take their retirement benefits. With the 6th of April 2015 just around the corner, the recent media frenzy has begun again as this new legislation finally kicks in for those of you who are eligible to take advantage of the new pension freedoms.
Defined Contribution Schemes
With a defined contribution pension you build up a pot of money that you use to provide an income in retirement and the income you might get from this scheme depends on factors including the amount you pay in and the fund’s investment performance.
Note: a defined benefit scheme provides a specific retirement income and individuals with these schemes are not eligible for the new pension changes.
So how do these new pension freedoms affect you?
To put it simply, you can take your whole pension as cash; you can invest it in traditional retirement income plans (such as annuities) or; you can use a combination of both. You need to bear in mind that however you decide to use your pension fund, it will be subject to taxation. You can opt to take your entire pension fund as cash – 25% tax free and the remainder will be taxed at the prevailing marginal tax rate (for the 2015/16 tax year, 20%, 40% or 45%). Alternatively, you could also draw lump sums from your pension at any time, again 25% tax free and the remainder at your marginal rate.
The choices you now have are designed to provide you with more flexibility and freedom but there are number of restrictions you need to be aware off. In fact, understanding the changes and deciding what is best for your circumstances needs careful consideration as the choices available are varied and can be complicated.
You should also be aware that pension scheme providers are not obliged to offer the freedoms available. Some occupational defined contribution schemes may not offer them and as mentioned above, defined benefit schemes are not included. Public Service pension schemes are also excluded.
Once you reach the retirement age agreed with your pension provider, you may also decide that staying invested in your pension is the best option for you, however, your provider will charge you administration fees for managing the fund. As long as your money stays in your pension you don’t pay any tax on it. You can also continue to pay into your pension up to your annual allowance, which is currently £40,000 (for the 2015/16 tax year). Choosing this option means your pension pot could grow further. Any money you leave in your pension pot can be passed on tax free if you die before the age of 75. As with every investment the value of your pot could go up or down.
We can help you understand your options
The rules and regulations around topics such as retirement and pensions change regularly, but we know from experience that what is most important when any new financial changes come into effect is to get good advice. I am including in the table below a brief description of the latest changes but it really is something which needs to be explained in detail.
In helping you to understand the options that are best for you it is important to look at the following:
- What type of pension/s you have
- Any state pension you may be getting
- The value of your pension/s
- How long your pension fund will last you during your retirement
- What options you have for your retirement income
- The tax implications
There are also issues such as how taking a lump sum could affect the value of your estate and any inheritance tax liability, what happens to your pension if you get divorced and what you need to consider and actions to take on death, all of which we will cover with you if we feel it is appropriate for your circumstances.
|Pension Options||What happens from 6th April 2015|
|Capped Drawdown||Capped drawdown arrangements restrict how much income can be drawn from your pension. From the 6th April 2015 there will be no new capped drawdown arrangements available. Existing arrangements will be allowed to continue including switching between pension providers.|
|Flexi-Access Drawdown||Currently, flexible drawdown arrangements have no restrictions on how much can be withdrawn, but you must have a guaranteed ‘secure income’ of £20,000 per year. From 6th April 2015, all flexible drawdown arrangements will become ‘Flexi-Access Drawdown’ which means there is no requirement for ‘secure income’. These arrangements are available to anyone and taking tax-free cash does not affect the annual allowance of £40,000. However, if you decide to then take an income from the remainder of your pension, this will unfortunately trigger a reduction in the annual allowance to £10,000.|
|Uncrystallised Funds Pension Lump Sum (UFPLS)||From 6 April 2015 you can take money direct from your pension pot without having to buy an annuity or put the money into drawdown, and 25% of this sum will be tax free. This is called an ‘uncrystallised funds pension lump sum’ (UFPLS) and this will reduce your annual allowance to £10,000|
I am happy to talk through the restrictions that apply to the “freedoms” outlined above. Another useful service is Pension Wise. This service was set up by the Government when the new legislation was announced last year to ensure individuals had access to impartial guidance on the changes and how this may impact their pension income. This can be accessed via their website www.pensionwise.gov.uk by telephone from The Pension Advisory Service (TPAS) or face to face from Citizens Advice Bureau.
The above information is based on our current understanding of HMRC rules and regulations and may be subject to change.
These links may be useful: www.moneyadviceservice.org.uk and www.direct.gov.uk
Twitter users: Martin Lewis of MoneySavingExpert tweets general advice and also answers some personal finance questions- @MartinSLewis and @Moneysavingexpert
The Which? Money team (@WhichMoney) tweet smart money guides.