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Pensions Flexibility - New Opportunities
In the 2014 Budget, the Chancellor announced a number of changes to pensions, designed to make them more flexible and appealing to ordinary investors. The detailed draft regulations have now been published and provide more clarity on exactly how the new rules will operate in practice when they are introduced in April 2015.
Perhaps the first thing to note is that a number of things won’t be changing. The new legislation only applies to defined contribution pensions, so defined benefit schemes (eg. final salary and career average pensions) will continue to operate as they do today. The ability to make company and personal contributions from pre-tax income and for the pension funds to then accumulate in a largely tax-free environment also remains.
The key amendments relate to the options you have at the point you want to get hold of the money you have saved and to the tax treatment of any remaining funds when you die. This article will focus on the first set of changes, with the estate planning implications covered in the next By the Dart.
Taking your whole pension pot as a lump sum
Anyone over the age of 55 (or who is unable to work because of poor health) will be able to take their whole pension pot as a lump sum. 25% of this will be tax-free and you’ll pay income tax on the rest.
Flexi-Access Drawdown
This option allows you to take 25% of your pension pot as tax-free cash and leave the rest of your funds invested in a drawdown account. You’ll then be able to withdraw an unlimited amount from this account, either as a regular income or as a series of one-off payments. Again, these withdrawals will be taxed as income.
Taking Ad-Hoc Lump Sums
Instead of taking a one-off tax-free lump sum, you could choose to just dip into your pension savings as and when you need them. Each time you withdraw an ad-hoc a lump sum, 25% of it will be tax-free and you’ll pay income tax on the rest.
Buying an annuity
Either at the point you retire, or at a later stage, you can still use any pension savings to buy an annuity – an insurance contract that offers a guaranteed lifetime income.
Getting Advice
There is no doubt that all these changes make pensions a more attractive proposition but the new rules also increase the range of potential outcomes: some will undoubtedly enjoy a more prosperous retirement, receiving a higher pension income and paying less tax. Others will mis-calculate and, sadly, run out of money.
There are also some potential traps for the unwary; for example, once you have used the new pension income freedoms, your tax-advantaged annual contribution limit for defined contribution pensions will fall from £40,000 to only £10,000.
Although the rules may be changing, the Government is not forcing pension providers to offer all of the flexible options. You may find, particularly if you belong to an older scheme, that your choices are restricted. You could switch your pension to a provider that offers more flexibility but there may be a charge for doing so.
Although the Citizen’s Advice Bureau and Pensions Advisory Service will offer free guidance on these issues, these organisations will not be offering qualified, regulated financial advice. This means that they cannot make any specific recommendations and, importantly, if you do make the wrong choices there will be no legal recourse, either through the courts or the Ombudsman, over the guidance you received.
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
For more information contact Ian Thomas 01803 839194 email: ian@pilotfinancialplanning.co.uk
First published By the Dart December 2014