From 6th April 2015 many new pension rules are taking effect, including giving pension investors aged 55 or over unprecedented freedom over how they can access their defined contribution pensions. It’s been said that the new rules are “the most radical changes to pensions in almost a century” so it’s important everyone affected is suitably prepared.
So what are these changes and how will they affect you?
‘Flexible Access’ to your pension
From April 2015, if you are aged 55 or over you will have total freedom in accessing a lump sum and/or an income from your Individual, Personal, Stakeholder or Self-Invested Personal Pension, as follows:-
- You can take the whole of your fund as a cash lump sum in one go; 25% is tax free and the rest would be taxed as income;
- You can take smaller withdrawals as and when you like, with 25% of each paid tax free and the rest taxed as income;
- You can purchase a regular guaranteed taxable income via an annuity with up to 25% of your account as a tax free lump sum;
The crucial difference to the current rules is that there is no limit on the amount you can withdraw from your pension. Pre 6th April 2015 people drawing an income directly from their pension are restricted by a government cap on their income each year.
Each year, you are entitled to tax relief on pension contributions equivalent to the lower of 100% of your annual earnings or the current ‘annual allowance’ of £40,000. Under the new rules, if you make any withdrawals from your pension, tax relievable pension contributions may be restricted to £10,000 per year.
If and when you access retirement benefits via the new rules, you must (within 91 days) inform any pension providers to which contributions are subsequently paid or face a £300 fine.
55% ‘Death Tax’ abolished
Pre 6th April 2015 it’s only possible to pass your pension fund on to your beneficiaries as a tax-free lump sum if you die before 75 having not taken any retirement benefits; otherwise, any lump sum paid from your fund is subject to a 55% tax charge. From 6th April 2015, the tax treatment of any pension you pass on (that has not been used to purchase an annuity) will depend on your age when you die, as follows:-
Pre Age 75: Your beneficiaries can take the whole of your fund as a tax-free lump sum or draw a tax free income from it
Post Age 75: Your beneficiaries will have 3 options:-
- Take the whole pension fund as cash in one go, subject to 45% tax
- Take a regular, taxable income
- Take periodical lump sums through income drawdown, taxed as income
Death after buying an annuity
When buying an annuity you can choose for an income to be paid to your partner after your death, known as a ‘joint life’ annuity; you can also include a guarantee period, ensuring payments will be made for a minimum length of time, irrespective of when you die.
Currently any payments made after your death are taxed at your beneficiary’s highest rate of income tax, but from April 2015, these will be made tax free if you die before age 75.
A joint life or dependant’s annuity could be paid to anyone after you die (subject to restrictions set by your annuity provider) i.e. not just your spouse and on that person’s subsequent death, if there is still any benefit remaining, it can be paid to someone else.
Transferring Defined Benefit / Final Salary Pensions
Most people with a Defined Benefit pension will also be able to take advantage of the new rules and make unlimited withdrawals. To do so, you will need to transfer your scheme benefit to an appropriate Defined Contribution pension, but in doing so you would lose very valuable guaranteed benefits.
As such in most cases it is not beneficial for scheme members to transfer their Defined Benefit pension scheme benefits elsewhere. It is essential you seek independent financial advice before taking any action in this area.
Minimum Retirement Age
The earliest age at which you can draw your pension is age 55; however, this is set to increase to 57 from 2028 and will continue to at 10 years below the State Pension Age (increasing in line with future changes) although this will not apply to Public Sector Pension Schemes.
For further information please contact us on 0844 406 0027
All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change. This is information is not provided as advice or a recommendation.