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It has certainly been a momentous year in the pensions world. The March budget set the ball rolling with changes to flexibility and how retirement funds will be accessed and is probably the biggest shake up in the last 25 years.
Those with relatively modest retirement pots (less than £10,000 and no more than £30,000) will be able to access the funds in full and the age at which you are able to access them will be reduced from 60 to 55. There may still be tax implications though, so care is required.
For larger retirement funds, access in full is available from April 2015 onwards. 25% of the fund will remain tax free with the balance taxed at the member’s marginal rate of tax, whereas previously a guaranteed retirement income of £20,000 (now £12,000) was required to be able to take the fund as lump sum.
The government also recently announced a significant shift in how pension death benefits will be payable.
Prior to the March budget, up to age 75 those with benefits held within a defined contribution plan (such as a personal pension, stakeholder pension or similar) could generally pass the benefits to nominated beneficiaries completely free of taxation, whereas a tax charge of up to 55% applied for those who had started to access/drawdown benefits. Going forward, the government has elected to scrap these rules and from April 2015 onwards, those aged 75 or below, irrespective of whether they have accessed their retirement pots, will be able to pass death benefits to their beneficiaries tax free in most cases.
Post age 75, beneficiaries should be able to receive benefits subject to their own personal marginal rates and transitional rules will be put in place for these cases.
The sudden attractiveness of defined contribution pension schemes has led the government to announce that they plan to ban the transfer out of government funded pension schemes, such as those offered to employees within local authorities, the NHS, state education and the civil service, although transfer away from privately funded final salary schemes will remain possible.
As part of the changes the government also announced relaxation to how annuities can be structured and the maximum ten year guarantee rule will be removed.
Those with relatives who were recently deceased and held substantial pension pots should take advice immediately. By deferring taking benefits until after April 2015 they could potentially access the funds tax free, rather than incurring a 55% tax charge.
For some, the temptation to access their pension funds in full may never be greater, so great care should be taken if you now feel the need to draw down your retirement pot in its entirety. With average life expectancy now in the eighties, exhausting your pension fund early with no funds to live on later in life is not going to be much fun.
Drawing down funds in full may also lead to unnecessary taxation, as benefits beyond the 25% tax free lump sum will be taxed at the individual’s marginal rate, although to counter this, funds can be rebuilt to some degree with the new £10,000 per annum contribution limit from 2015.
Sceptics might suggest that this all points to the death of the annuity and it is a quick way of boosting the Treasury’s coffers, but what is clear is that more than ever before it is vital that those considering making changes to their pension arrangements, or simply looking to access funds should seek independent financial advice.
Neil Davis, Financial Planning Consultant
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