Access to your entire pension pot?

George Osborne’s 2014 Budget introduced new rules that radically effect how pensioners use their accumulated funds.

The follow-up consultation relates to how (and whether) the proposed changes will happen. The Government aims to confirm changes (that become effective from April 2015 onwards) by 22 July 2014.

The first of a series of reforms came into effect on 27 March 2014 and by April 2015 it is proposed that all restrictions on access to your pension pot will be removed - the intention being that it will be easier to use your entire fund as you wish. For example someone aged 60 with a £100,000 pension pot who was due to receive their State Pension at aged 66 could actually choose use their full £100,000 pot over the next 6 years to bridge the gap between age 60 and State Pension age. Clearly this makes pension arrangements much more flexible from March 2015 onwards.

In the meantime a number of measures are being implemented that increase the amount of retirement savings that can be readily accessed and affect anyone saving into a personal pension, or a workplace scheme where payouts are based on the performance of the underlying investment fund rather than final salary.

If you are about to reach pension age (at least 55, but your scheme may have different rules), the first set of changes may apply, where:

You have accumulated up to £30,000 in your pension

The amount you are able to withdraw from your pension as a lump sum has increased from £18,000 to £30,000.

Of this, 25% remains tax-free, the remainder attracting income tax at your highest personal rate. As the average pension pot amounts to around £30,000, many people are expected to take advantage of this.

Previously, these savers would have generally bought an annuity, the product bought at retirement that provides a lifetime income.

You have several small pension pots

You will be able to take up to three personal pensions worth £10,000 each as cash, rather than two worth £2,000 as previously. You can also cash in one workplace pension scheme worth £10,000 or less.

If you had three separate personal pension pots of say, £6,000, £7,000 and £8,000, you could take these as a lump sum of £21,000 with up to 25% tax-free and the remainder taxed at your personal rate.

You keep your pension money invested

Another of the changes relates to those choosing to go into income drawdown, leaving their pension fund invested and withdrawing an income from it.

You will be allowed to take a higher income, subject to your personal tax rate, with the Capped Drawdown limit being raised from 120% to 150% of the equivalent annual income you would have got had you bought an annuity.

From April 2015, the proposal is that you will be able to withdraw the whole amount, subject to your personal tax rate.

The rules around Flexible Drawdown have also changed. Previously, you could only use this method of drawing pension income if you had £20,000 of guaranteed pension income from other sources, but now you can use it if you have just £12,000 coming in from elsewhere.

What happens if you’ve already bought an annuity?

Once set up, annuities cannot usually be cancelled, but you usually have 30 days to change your mind (cancellation period). The start date will depend on the terms set out by your annuity provider, but some providers have extended this to allow more time to reflect.

Note – Some of these changes have yet to be confirmed, so please ensure that you seek professional advice before making a decision.

David Squire, Partner, Kendal

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