Handing back the control to Pension Investors

The government has now provided confirmation that changes proposed in the March budget are to take effect from April 2015.

What this actually means to you will depend on your personal circumstances and income needs in retirement.

Current legislation dictates that most people aged 55 or over can raise a tax free lump sum from their pension of 25% of the value of their fund with the remainder used to provide a restricted taxable regular income.

We have already seen a relaxation of these rules which took immediate effect from April 2014 however these will be much more far reaching with effect from April 2015 as follows:

Whole pension as a lump sum

From April 2015, it will be possible for individuals to take the whole of their private pension savings as a lump sum. The first 25% of this will remain tax free with the remainder taxed at your highest marginal rate.

You can decide to do this in one go or you can take a series of lump sums enabling you to manage the amount of tax that you pay each year.

Removal of income restrictions

Contrary to the headlines you may read, there has not been the necessity to purchase an annuity to provide you with your pension income for some time. You have been able to draw an income from your built up pension fund however the amount that could be withdrawn was restricted. This restriction will be lifted entirely next April allowing individuals to set income level themselves.

Using this method gives you the control over when and how you access your pension funds. However it also passes the responsibility of maintaining the income onto you.

Your pension fund remains invested which leaves you open to the value of your fund falling which will reduce your potential income in the future. Also taking income above recommended limits may result in your pension fund running out before you do!

Pension contributions once in drawdown

To combat people taking large lump sums from their pensions and then using them to make equally large pension contributions to benefit from the immediate 25% tax free lump sum availability, the government is set to introduce restrictions on how much you are actually able to contribute into your pension plan when you are in drawdown.

The maximum annual pension contribution that you can claim tax relief on currently stands at 100% of your earnings capped at £40,000. This will reduce to £10,000 per annum once you enter drawdown with effect from April 2015 if your pension pot is over £10,000 or you are already in drawdown and you select an income over and above the current maximum GAD limits.

Individuals who are already in flexible drawdown can not make further pension contributions however this will be revised and these investors will fall into line with the above and will be allowed to make future contribution of 100% of their earnings capped at £10,000.

Access to impartial guidance

It was initially suggested that pension providers would be obliged to offer impartial advice in respect of options at retirement. It has now been confirmed that this function will be offered by consumer-facing, impartial organisations such as The Pensions Advisory Service (TPAS) or the Money Advice Service (MAS).

Age at which you can take your pension fund

This is currently 55 however this will increase to 10 years before you are entitled to receive state benefits. If your state pension age is 67 then you will be able to access your private pension at age 57.

Tax charge on drawdown savings at death

When the new system comes into force in 2015, the Government has expressed an intention to review the current 55% tax charge that is paid on drawdown funds paid to beneficiaries as a lump sum. This decision has been deferred however it will be confirmed in the Chancellors Autumn Statement.

Annuity Flexibility

Annuity providers are currently governed by strict rules however these will be relaxed so that a more modern and appropriate approach can be adopted. The possibility of having an annuity that decreases over time, has no limit to the amount of income guarantee that can be applied (currently 10 years) and the ability for annuities to pay lump sums at future points are all to be introduced.

What does this means to you?

If you are already approaching retirement you may want to consider holding off making any decisions over the next seven months that will lock you into something that can’t be altered later. There are ways to draw an income now which will leave your options open come April 2015.

This removal of restrictions on how you can access your pension funds, handing the control back to the investor, makes investing in pensions a much more attractive option for many.

Important note

The above is based on our interpretation of the Treasury’s response to the consultation “Freedom and Choice in Pensions” and supporting documentation as at 21 July 2014. When further details and draft legislation is published (expected August 2014) our understanding could change. Tax treatment can change and will be dependent on your individual circumstances. The value of investments call fall as well as rise so you may get back less than you invest.

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