22 July 2014

How Will the Latest Pension Changes Affect You?

The Government announced its plans on pension changes in more detail yesterday. That's in response to the "Freedom and Choice" changes announced in the March Budget. So how will the changes affect you?

As always with this blog, this is not personal advice but general information. I recommend taking financial advice before taking any actions - it could make a big difference to your future.

If you are confused and need "guidance"...

The Government has confirmed a guidance service will be introduced for people approaching retirement. Details are still being worked on (like who provides it), but it is likely that the guidance will take the form of telling you who to go to for the real advice in your circumstances. We would, of course, recommend taking independent financial advice which will be completely focussed on getting you the best option.

If you are still working and building up a "defined contribution" pension plan...

No changes relating to this phase of life, although you may want to include withdrawing some of your pension money in your future plans - see below.

If you are still working and have a "defined benefit" pension plan from your employer...

No changes here either, but you may be able to transfer your pension into a "defined contribution" plan in future to take advantage of the withdrawal option. That won't apply if you work for a public sector employer with an unfunded scheme though (i.e. where your future pension will be paid by future tax revenues). Any transfers will have to be with advice from a financial adviser independent from the scheme (unless the benefits are valued below £30,000).

If you want to withdraw some (or all) of your pension as a lump sum...

This is the big change. You will be able to do this from April 2015 once you are over 55 (or 57 from 2028, and thereafter 10 years before the State Pension Age as it continues to go higher). However, apart from the 25% tax-free lump sum, the rest will be taxable as income so you risk paying higher rate (40%) or even additional rate (45%) tax, so care is needed. And of course you need to have other plans in place to ensure that you receive an income throughout retirement.

If you are retiring and want a guaranteed income for life...

Buying an annuity is still likely to be a good option for many people. There are existing variations, too, where there is potential for an increasing income. There are also some new options being introduced by a relaxation in the rules, such as guaranteed annuities which reduce in value in the middle years of retirement, then increase again later. Also there will be options to allow beneficiaries to receive payments as a lump sum rather than an income after the pensioner's (annuitant's) death.

If you are retiring and want a flexible income...

Income drawdown remains an option. The existing "flexible drawdown" regime is what provides the framework for withdrawing your entire pension, but a more sensible approach for most people will be to take a sustainable income based on an investment portfolio. Previously there hasn't been anything to stop you continuing to contribute to a pension plan as well as taking an income (and getting the benefit of a further tax-free lump sum), but in future, if you take a pension income (beyond the tax-free lump sum) you will be limited to £10,000 per year of further pension contributions. 

The two exceptions to this are (a) if you are already in a "capped drawdown" arrangement the reduced annual allowance won't apply, and (b) using the small pensions rules to withdraw from such plans won't enforce the reduced annual allowance either.

If you are concerned about who gets your pension money when you die...

Other than the potential for new options with annuities (referred to above), on death when in a drawdown arrangement, your beneficiaries can receive the balance as a lump sum, but currently taxed at 55%. There is recognition that this is a bit steep(!) and the Chancellor plans to review this.

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