The new Pension Reforms provide a significant change allowing people greater flexibility and responsibility over how they take their pension. It will be available from April 2015 with some concessions available now.
In future everyone who has a non- Public Sector Pension Scheme will be able to take as much pension as they wish each year until their funds run out . In Theory they can take all the money out of their pension in one go. In reality most people with pensions will probably wish to provide for their years in retirement and this can be achieved either through annuities or drawdown products as well through Defined Benefit Schemes if they have them. The difference is that as the rules have relaxed on both annuities and drawdown, it does offer the opportunity to generate a flexible pension income strategy.
This is good news for those who will build a pension income strategy and perhaps good news for the Chancellor for those who will take the cash all at once.
Annuities will be able to reduce in value and you will be able to take a lump sum at the end for example. With regards to drawdown you will be able to change your income level each year and continue to pay into your pension and gain the tax advantages.
The tax implications need to be considered at all times, by taking a greater income you may pay more tax and there are possibilities of moving into the high rate tax bands.
For some people taking the cash option will be a good option, however this will tend to be the lower value funds. Most people with more than £20,000 to £30,000 in their fund will benefit from some form of pension strategy to ensure they pay the right levels of tax and have the required level of income. Taking pensions funds and moving this money into savings may not be the best solution as pensions investments are not taxed. Whilst there are costs associated with pensions their return is tax efficient. People need to understand that pensions are now savings as ISA’s are savings and they will hopefully gain the benefits.
Pensions do have a degree of complexity and using a company to help you maximise your pension strategy will be a sensible solution and of course some products are only available through intermediaries.
Some of the key points are as follows:
- Everyone will be able to receive free personal pension guidance but it will not provide recommendation regarding specific products or providers. It will be provided by Independent organisations that will be be monitored by the FCA. They will include MAS, TPAS and may include CA and Age Concern.
- Private Sector Defined Benefit Schemes DB (Final salary).
Transfers from a DB scheme to a money purchase or defined contribution scheme will be allowed however people wishing to do this must have Formal Financial Advice.
- Public Sector Defined Benefit Scheme (Final Salary)
Transfers from a Public DB scheme will not be allowed however triviality rules will allow access to pensions valued less than £30,000 and the age will be lowered to 55.
- Changes are being made to tax rules which include the allowance to continue to pay into pensions whilst in a flexible drawdown arrangement and the Chancellor is reviewing the 55% tax in death on certain drawdown products in the Autumn statement.
- The age that you can take you pension is moving from 55 to 57 in 2028 and there will continue to be a 10 year gap between state pension age and private pension age.
- Annuities will be able to decrease in value and lump sums will be able to be taken to cater for specifics like care fees. The removal of the 10 year guarantee limit and the options to pay a lump sum as long as the value of the remaining annuity is less than £30,000 provide improved death benefits.
- Drawdown will be available to all dependant on providers limits. The Flexible Drawdown option will be available to all.
If someone goes into a drawdown scheme after April 2015 they will be able to continue to pay into their pension up to £10,000 per annum and gain the associated tax benefits.
If someone is already in Flexible drawdown they cannot currently pay into a pension but after April 2015 they will be able to pay £10,000 and gain the tax advantages. Anyone who is currently in Capped Drawdown can continue to pay as much as they wish into their pension if they wish to take more than their capped amount they will fall into the new £10,000 limit.