In the Budget statement in March, George Osborne, boldly went where no chancellor has gone before. Deep into uncharted space, he set phasers to stun as the Government look to start a new five year mission (to be re-elected). Star Trek references aside the Government has unveiled plans to completely overhaul the UK’s current pension system.
From April 2015, from age 55, whatever the size of a person’s defined contribution pension pot, the Government proposes that they’ll be able to take it however they want, subject to their marginal rate of income tax in that year. 25% of their pot will remain tax-free and individuals will benefit from increased flexibility. People who continue to want the security of an annuity will be able to purchase one and people who want greater control over their finances can drawdown their pension as they see fit. Those who want to keep their pension invested and drawdown from it over time will be able to do so.
The current system is much less flexible for savers when they come to access their defined contribution pension during their retirement. Savers are currently charged 55% tax if they withdraw the whole pot and three quarters of people currently have little option but to buy an annuity – an insurance product where a fixed sum of money is paid to someone each year, typically for the rest of their life. A ‘capped drawdown’ pension allows you to take income from your pension, but there is a maximum amount you can withdraw each year. With ‘flexible drawdown’ there’s no limit on the amount you can draw from your pot each year, but, using the previous rules you must have a guaranteed income of more than £20k per year in retirement to trigger this option. The one exception granted was for small pension pots, where savers aged 60 and over and with an overall pension saving of less than £18k could take their entire fund in one lump sum.
The Treasury states that the Government has already helped to increase the security of people’s income in retirement by introducing automatic enrolment into workplace pensions and the triple lock guarantee. Ahead of the changes in April 2015, the following further changes have been introduced as of March 27th 2014:
- The amount of overall pension wealth you can take as a lump sum has increased from £18k to £30k. The amount of guaranteed income needed in retirement to access flexible drawdown has reduced from £20k per year to £12k per year.
- The maximum amount you can take out each year from a capped drawdown arrangement has increased from 120% to 150% of an equivalent annuity.
- The size of a small pension pot that you can take as a lump sum, regardless of your total pension wealth, has been increased from £2k to £10k.
- The number of personal pension pots you can take as a lump sum under the small pot rules has increased from two to three.
If you would like to discuss how the new pension rules might influence you and the different ways in which you could now choose to take your pension income, then please do feel free to get in touch, at which point we will be more than happy to discuss your individual situation and how you could live long and prosper!