Planning for retirement? New rules coming soon

6 April 2015 sees the introduction of some radical to changes to pensions that will provide all UK individuals with much greater flexibility when accessing their pension savings from the age of 55. Whilst this is positive news for most, the vast array of options and possible tax implications also demonstrate additional complications and seeking professional advice is key to avoiding some of the pitfalls.

Retirement options before 6 April 2015

For all money purchase scheme arrangements, pensions can be paid via any of the following methods:

  1. A scheme pension – this is a pension paid by the scheme administrator (or an insurance company selected by the scheme administrator) which is payable for life and except in certain specified circumstances, cannot reduce in payment
  2. A lifetime annuity – this is an annual income paid for the lifetime of the purchaser. A guaranteed period of up to 10 years can be specified at the outset. By using the Open Market Option, the member has the opportunity to select the product provider and those in poor health can often obtain better terms. Except in certain circumstances the income cannot reduce in payment
  3. A drawdown pension – there are two types of drawdown pension; capped drawdown and flexible drawdown.

Capped drawdown – HMRC rules limit the amount of income that may be withdrawn from the arrangement. The current limit is 150% of the value of an equivalent annuity, as set by Government Actuary Department tables. Withdrawals are taxed as PAYE pension income.

Flexible drawdown – There is no limit on the amount that can be taken each year as drawdown pension.

Some scenarios may permit the entire pension fund to be paid as a lump sum payment instead of one of the pension options listed above.

Trivial Commutation – those aged 60 with pension rights under all registered pension schemes of no more than £30,000 can take this as a lump sum payment. 25% of this is tax free, the remainder is subject to tax at the individual’s marginal rate.

Small pots – Regulations allow for up to three small pension funds of £10,000 or less to be paid out as a lump sum. Again, 25% of the total is tax free, the remainder being subject to Income Tax as above.

Choosing the right vehicle will depend upon your personal circumstances and views. The size of your fund, your income requirements, your age, your health and your willingness to take investment risk are all important considerations. Professional advice is often essential to cover all the options and to find out which is best for you as all solutions can impact upon the amount being taken and how long it can be sustained for.

What changes are being introduced in April?

Flexi-access drawdown funds (FAD) – new plans first created on or after 6 April 2015. There are no restrictions on the withdrawals that can be made. Existing capped drawdown arrangements can remain under current rules and restrictions, or be converted to FAD. Existing flexible drawdown contracts will automatically become flexi-access drawdown funds.

Uncrystallised Funds Pension Lump Sum (UFPLS) – this enables people to fully access their pension funds that haven’t yet been brought into payment. 75% of each payment will be taxable as pension income at the individual’s marginal rate of income tax, with the remaining 25% will be tax free.

Money Purchase Annual Allowance (MPAA) – all individuals accessing their pension savings via the new flexible methods of FAD, UFPLS or an annuity will receive a new £10,000 annual allowance for money purchase pension savings. Annual contributions up to this amount will still be permitted, but there will be no ability to carry forward any unused annual allowance from previous tax years.

Changes are also being made to the treatment of benefits on the death of the member. Where death occurs before age 75, any payments of income withdrawal to the beneficiary or successor can be made tax-free, providing the funds are designated within a two-year period. If this is not made within two years, or if the member reaches age 75 at the time of their death, all payments of drawdown pension will be subject to the recipient’s marginal income tax rate.

Similar changes are also being made in respect of annuities, so that pension death benefits in the form of an annuity can be paid to anyone, not just a dependant, and payments from the annuity can be made tax free where the member died before age 75.

Despite many predicting their demise, a lifetime annuity still remains an option at retirement for many, especially those wishing to secure a guaranteed lifetime income, but instead the guaranteed period will not be restricted to 10 years and the payments can reduced, whereas at present they are fixed.

Channel 4’s Dispatches programme ‘How to Blow your Pension’, screened on Monday 12 January, highlighted the importance of seeking financial advice from a regulated adviser and that without careful planning some people could find themselves in great financial difficulty later in life. An independent financial adviser can examine the whole market and help you source the most suitable solution based upon your individual circumstances. Speak to us about your plans.

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