The changes to your pension, announced in the Budget earlier this year, took everyone by surprise.
After a period of consultation the Government has now started to release the final proposals, which will come into effect from April 2015.
So what will change? How will you be affected? Will it make you better or worse off?
Read on to find out.
Despite calls from some quarters for the original proposals to be watered down it seems the Government is in no mood for a U-turn.
From April 2015 anyone over the age of 55, who does not wish to turn their pension pot into an income, perhaps by buying an Annuity or using Income Drawdown, will be able to take their whole pension as one lump sum.
If the lump sum option is chosen, 25% of the pension pot will be available as a tax-free lump sum, with the rest added to your income and then taxed at a rate of 20%, 40% or 45%.
Flexibility for members of Defined Benefit / Final Salary Pensions
When the proposals were first announced the Chancellor suggested that they would not apply to members of Defined Benefit or Final Salary Pensions.
Their main concern was that thousands of people would transfer benefits out of unfunded public sector pensions, placing a huge drain on the public finances. The Government has now partially changed this stance:
- People in private or funded public Final Salary and Defined Benefit pensions will be allowed to take advantage of the new flexibility
- Anyone wishing to transfer more than £30,000 from a Final Salary or Defined Benefit pension will be forced to take and pay for regulated Independent Financial Advice, which is different from the ‘Guidance Guarantee’
Pension experts are already nervous about this change, worried that people could be giving up valuable guaranteed and index-linked pensions. Indeed in his statement today, the Chancellor says: “For most Defined Benefit pension scheme members it will be in their best interest to remain within the scheme.”
Tax-free lump sum
The Government has confirmed that the 25% pension tax-free lump sum won’t be changed.
Tax on lump sum death benefits
Currently, if a pensioner using Income Drawdown dies and his or her spouse or partner elect to take a lump sum 55% tax will be applied.
It had been hoped that the Government would reduce the rate of tax charged on death, perhaps aligning it with the Inheritance Tax rate of 40%. However, the Government has delayed making a final decision.
Therefore, for the time being, it will remain the case that if the surviving spouse decides to take a lump sum, it will be subject to tax at a rate of 55%. Alternatively, if they buy an Annuity or continue with the Income Drawdown plan, the whole fund can be used without the deduction of tax, although the income produced may be subject to Income Tax.
In his statement, released today, George Osborne said that “the tax rules will be amended to allow providers to develop new retirement income products that are tailored to the needs of individual consumers.”
It has been announced that the Government will review the Annuity rules so help providers innovate and offer more flexible Annuity products.
The rules will change to allow providers to:
- Offer Annuities which allow lump sums to be withdrawn and the income to be reduced
- Remove the maximum 10-year guarantee period on Lifetime Annuities
- Allow payments from guaranteed Annuities to be paid to beneficiaries as a lump sum
In the Budget George Osborne said that anyone retiring would be given free face to face advice on their options.
This has now been watered down to a ‘Guidance Guarantee’, which will be provided by a number of independent organisations such as The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS).
The ‘Guidance Guarantee’ will be delivered either face to face, over the telephone or online, to anyone approaching retirement, who wants to make use of the service.
Whilst ‘Guidance’ will be free, and paid for by a levy on pension providers, it won’t make specific recommendations to pensioners, giving only more generic guidance.
It had been thought that ‘Guidance’ would be delivered by pension providers, but the Government has backed away from this idea, saying: “The Government wants to ensure that guidance is trusted by consumers, and the vast majority, including most of the financial services industry who responded, said that consumers would not trust guidance given by a person or organisation with a vested interest in selling a financial product or service.”
The maximum yearly pension contribution is known as the Annual Allowance and is currently set at £40,000.
For people who have not taken their tax-free lump sum this will remain unchanged.
However, the Government is concerned about pension recycling, where the tax-free lump sum and income is taken and then immediately reinvested into a pension to get additional tax-relief. Therefore, under the new proposals, anyone who takes more than their tax-free cash after the age of 55, will see their Annual Allowance cut from £40,000 to £10,000.
Confused? That’s not surprising, but we’re here to help
The changes will give every pensioner more flexibility and greater control over their pension, but there will be questions, complications and challenges:
- How do you take advantage of the new proposals?
- What combination of lump sums and income should you take?
- How can you be sure you won’t run out of money before you retire?
- How should you invest your pension?
- Is an Annuity now the wrong option?
These are just some of the questions you will need to answer before you can make an informed choice.
Our team of Independent Financial Advisers is experienced in developing retirement income strategies for clients the length and breadth of the UK.