The Government have now confirmed their intention to introduce what has been billed as the “most radical changes to pensions in almost a century”

The proposed reforms will mean that anyone with a money purchase pension will be able to draw out as much or as little as they want, once they reach 55. The first 25% will be tax free and the remainder taxed as income in the year it is taken. The current limits imposed on “Capped Drawdown” will be swept away, along with the minimum income rules for “Flexible Drawdown”.

Whilst the opportunity to take out large amounts in one go will be welcomed by many, more savvy savers will realise that the tax could be a big catch. If a basic rate tax payer takes a large lump sum they may well find they become a higher rate tax payer for that year. Those who will need to rely on their pensions for a lifetime income also risk finding that jam today leaves none for tomorrow.

Other Proposed Measures 

  • Rules to ensure all money purchase schemes members will benefit, and are not prevented because of outdated scheme rules.
  • Pension providers will also be given the opportunity to develop innovative new annuity products by the relaxation of some of the rules surrounding annuity design.
  • The option to transfer from final salary pension schemes will remain, but only if certain conditions are met.
  • People in unfunded public schemes (eg teachers, NHS, police, firefighters and HM Forces) will no longer be able to transfer their pensions.
  • Lump sum and incomes from money purchase schemes paid on death before 75 will be tax free. For death after age 75, lump sums and income will be taxed at the beneficiaries’ marginal rate of tax.
  • The ability for pension funds in drawdown and for annuities to be inherited by non dependant beneficiaries.
  • An increase in the minimum age for accessing pension benefits from 55 to 57 – but not until 2028, so plenty of time to plan ahead

Annual Allowance and Drawdown

The Government wanted to ensure that people don’t just access their cash lump sums, and then recycle them back into a new pension to benefit from tax relief. However they also want to enable those who want or need to continue saving to be able to do so. From April 2015, those who commence income drawdown will have a reduced Annual Allowance of £10,000 (instead of the standard £40,000). Those already using capped drawdown will not be disadvantaged by this and those in Flexible Drawdown will find they can start making contributions again.

Guidance Guarantee

The Government have rightly identified that people will need help and advice to understand their options and make a decision that’s right for them. The proposals include provision for a right for everyone to receive free guidance before they retire, and they want this to be delivered by independent bodies, rather than the pension providers.

It will not however be a substitute for professional financial advice from experienced, qualified financial advisers. Pensions should not be viewed in isolation, but as part of the bigger picture of financial planning for life. The new flexible world will open up opportunities for tax-efficient planning for many as well as offering a raft of new products and options to consider.

The removal of the tax charge on death makes a pension an excellent planning tool, not only during life, but also as part of overall estate planning. Everyone who has not already converted their pension into an annuity is affected and we would be delighted to help guide you through the tax and cash flow implications.

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