Pension Changes - biggest shake-up in UK pensions
The Government has introduced a whole raft of changes to the current pension system which represents probably the biggest shake-up in UK pensions ever. The main driver for these changes is to provide individuals with more choice, control and ultimately responsibility over their pension savings. Although these changes will be welcomed by most, we believe it is still important for you to take advice on how best to use the new rules when considering taking benefits from any pension arrangement.
Removal of income limits
From April 2015 restrictions on the level of income taken from money purchase pensions will be removed. Some final salary schemes and older contracts which are not sufficiently flexible will not be able to enjoy this flexibility. Similarly, those already in annuities will not be able to alter their situation. There is however a fledgling movement looking at the possibility of ‘unwinding’ some annuities that were purchased just before the changes in legislation were announced.
In effect, anyone over the age of 55 will be able to take what they want, when they want, from their pension funds. There are two bases on which the funds can be withdrawn but in effect 25% of the fund can be taken as a tax free lump sum with the residual above that level being added to other taxable income and taxed at an individual’s marginal rate, i.e. 20%, 40% or 45%.
Is the new flexibility available for all pension plans?
As mentioned above, those who have purchased annuities or are in the old style pension schemes will not be able to use the new rules. Those in unfunded final salary schemes (teachers or NHS employees, for example) will also most likely not be able to take advantage. It is therefore important that advice is taken when considering retirement options. We are also yet to see whether pension providers will be able to update their systems in time for next April in order to facilitate these freedoms.
Ability to continue to make pension contributions
Those individuals who currently have flexible drawdown under the existing rules will automatically be covered under the new flexi drawdown access rules. Whereas at this time these individuals cannot make any further pension contributions to get further tax relief, they will now be able to pay up to a further £10,000 pa into a pension plan.
Death benefits for those in drawdown or over age 75
Under the current rules, the beneficiaries of individuals who have taken benefits - either their tax free lump sum or income, or are over age 75 without having taken benefits - have to pay a tax charge of 55% of the residual fund on death. The government are proposing to initially reduce this to 45% from April 2015 and bring it in line with the individual’s marginal rate of tax from April 2016. We will not have confirmation of this until later in the year but, again, it is important to take advice in this area.
Can I transfer my final salary benefits to a money purchase plan to take advantage of the new rules?
Individuals with funded final salary benefits may be able to transfer the value of their funds to a money purchase plan to take advantage of the new rules but only after having taken independent advice on the suitability of a transfer. In most instances individuals with final salary benefits are more likely to be better off staying where they are. Those with unfunded final salary benefits cannot (at this stage) take advantage. On the flip side, those with benefits with a capital value of less than £30,000 will not have to take advice.
Are annuities a good option when taking benefits?
The new rules have been driven by the perception that buying an annuity offers poor value. Although individuals may feel this is the case, low interest rates and increasing longevity mean that for many, an annuity may still be the right option when they take their pension benefits. The new rules are, however, driving innovation in this area and we are seeing more flexibility in the types of annuities being offered. As already stated, it is important to take advice in order to ensure the choices you make are in line with your current and future objectives.