In the last couple of weeks the government have confirmed that massive changes to the treatment of pensions, and the choices available to you, will take effect from April 2015. These changes will make contributing into a pension fund much more attractive to many people, as well as presenting some interesting tax planning opportunities. These may be of particular interest to people who have taxable income just above one of the various tax bands that our system imposes.
- Currently, you can take a lump sum approximating to 25% of the total fund value, and this lump sum is tax-free. The remainder must be invested in an annuity, and this is a particularly unattractive feature of pensions to many people. From next April, the 25% tax-free lump sum remains as at present, but there is complete freedom in how the remaining fund is treated. Subject to tax, you could even take the whole fund out immediately, or you could take out a succession of lump sums over a number of years. These choices can be exercised by anyone over 55 years of age.
- This means that all limits on income drawdown are abolished, as well as the need to purchase an annuity. However, with this new freedom comes the possibility that you could run out of money in retirement. Currently, with an annuity you are guaranteed an income for life, but these new freedoms means that pensions will be subject to the “once it’s gone, it’s gone” rule.
- Once any income is taken from a pension fund then, subject to some limited exemptions for very small pension funds, the total contributions that can be made into a pension fund will be restricted to a reduced limit of £10,000. This is an anti-avoidance measure.
- These changes apply to people in final salary pension schemes. However, in order to do so they will need to transfer their fund into a defined contribution scheme. This could be seriously disadvantageous and advice would be strongly advised. Accordingly:
- A free and impartial pension advice scheme is being set up. This will be through “The Pension Advisory Service” or the “Money Advice Service”.
- The age that these choices can be made is 55. However, this will rise to 57 in 2028, and will then remain at 10 years below the ever-increasing state retirement age.
These changes apply to pension funds in existence in April 2015 and which have not paid out any benefits or drawdowns. Therefore, unless you are forced to do so by the current rules you should think very seriously before taking a lump sum or starting a drawdown in the next few months. Doing so could seriously limit your choices in the future.
WatkinsonBlack cannot give investment advice, and the above is general guidance only. Should you wish to take advice on this matter then we can recommend independent advisers who would be able to assist you.