Back in March, the chancellor George Osborne announced major changes for money purchase Pension schemes. The changes bring about control and flexibility for pension savers, all of which are excellent news and bring greater opportunities to pension savers both now and for the future.
Over the past few months the government has taken consultation on the proposed changes to pensions allowing more freedom and choice. In August the HMRC issued its draft guidance for the taxation of pensions.
So what do we know so far?
Well, from the 6th April 2015 there will be four main ways for an individual to access money purchase pension savings:
- Annuity Purchase
- Scheme Pension
- Uncrystallised Pension Fund Withdrawal
Changes to Annuities
The draft legislation will mean that the rules will change so that clients will now be able to take advantage of a new style of annuities, from 6th April 2015 annuities can:
- Allow for decreases and increases in income if determined at outset, previously income had to be fixed at outset and it could not be changed;
- The draft legislation has also set a provision where there will be no maximum guarantee period (previously guarantees were capped at 10 years from starting the annuity).
These changes are designed to make annuities more attractive and potentially better value for money.
Flexi-access drawdown – maximum freedom
This is the headline major change we expect to be introduced.
The new flexi-access drawdown will have no limits to the amount of withdrawals that can be made.
Depending on the how much you withdraw and when, income tax could be due at your highest marginal rate on some or all of the withdrawal.
We believe taking advice on when and how you draw benefits is crucial so that you minimise the amount of tax you may have to pay and to understand the sustainability of withdrawals, to avoid running out of pension cash or income in retirement.
Annual allowance reduced (how much you can pay in pension contributions)
With the introduction of freedom for pensions, the government and the HMRC were concerned that the new flexibility could be abused from a tax relief perspective. The draft guidance contained a new “money purchase annual allowance” for anyone accessing flexibility from their pensions.
The normal annual allowance for pension contributions is £40,000 per annum; however this will be reduced to £10,000 per annum for those accessing the new flexibility of pensions in certain ways.
The draft rules for which annual allowance applies are very complex, again we would recommend anyone looking to access pension benefits to seek advice; it may be possible to access your pension benefits without being affected by the reduced annual allowance.
Small pot lump sum payments will be able to be paid from normal minimum pension age, which is currently 55, rather than age 60 as it is now.
There is no change to lump sum death benefit payments. Funds in capped drawdown and flexi-access drawdown will be paid out as a taxed lump sum, as currently or used to provide a dependents pension.
Currently the lump sum death benefit is taxed at 55% of the remaining fund value. This level of tax is currently under review and we expect an announcement from George Osborne in the autumn statement to clarify the level of tax to be applied from April 2015. Many commentators are predicting that the level of tax applied will be reduced from the current 55% charge.
This document is designed to provide information only and should not be in any way construed as advice.