Pension
Investors will be able to take the whole of their pension as a lump sum
(SUBJECT TO CONSULTATION, POTENTIALLY EFFECTIVE FROM APRIL 2015)
Currently
most investors aged 55 or over can take up to 25% of their pension as tax-free
cash and a taxable income from the rest. There are, however, rules that
determine the maximum income most people can draw each year.
These
restrictions will be removed in April 2015 so pension investors will be able to
take the whole of their
pension as
a lump sum if they so wish, subject to consultation. The first 25% will be tax
free, whilst the rest will be taxed as income. (If you are an Italian
resident, then the lump sum will be treated as income and added to the rest of
your income for the year of
withdrawal. If the lump sum is
sizeable you could pay as much as 43% on it).
New
higher income drawdown limits (EFFECTIVE FROM 27 MARCH 2014)
Drawdown
investors currently have a yearly limit to the income they can draw. They can
choose from zero up to the maximum. This maximum has increased by 25% (from
120% to 150% of a broadly equivalent annuity) for investors starting a drawdown
account after 27 March 2014.
For
instance, an investor aged 65 with a £100,000 pension starting drawdown today
can draw a maximum
income of
£7,080 a year. If they start from 27 March 2014 this will rise to £8,850
Flexible
drawdown more accessible (EFFECTIVE FROM 27 MARCH 2014)
Flexible
drawdown allows investors to make uncapped, unlimited withdrawals from their
pensions. There are, however, strict qualifying criteria. The main one is that
you must already have a secure pension income of at least £20,000 a year in
place (including any state pension).
From 27
March 2014 this limit is reducing to £12,000 (including any state pension).
This means a far greater number of investors should be able to qualify.
The £12k income must be “relevant income” so only the following will
count:
State
Pension, Scheme Pension (so a final salary pension which is fixed), Lifetime
annuities, Overseas Pensions (but only overseas state pension or final salary,
not QROPS income, as that can change over time), Pension income provided
by the Financial Assistance scheme.
This
income does NOT count: rental income, dividends, interest, drawdown
pension income, part time salary etc all do not count, so it is still
relatively hard to get to the £12k amount. These don’t count as they can all
change, capital can be spent, investments sold, drawdown income finish.
More
flexibility for investors with small pots (EFFECTIVE FROM 27 MARCH 2014)
From 27
March 2014 investors aged 60 or over with total pension savings under £30,000
will be allowed to draw them as a lump sum. The first 25% will be tax free, and
the rest taxed as income (for an Italian resident, neither the 25% nor the
other withdrawals will be tax free. And
any withdrawal will be treated as income for that year).. This can only be done
once.
Investors
with individual personal pension pots smaller than £10,000 will be allowed to
draw them as a lump sum from age 60. Again, the first 25% will be tax free, and
the rest taxed as income. This can only be done three times.
Lump
Sum Death Benefits
The 55% tax
charge on certain lump sum death benefits will be reviewed. The Government
believes that a flat rate of 55% will be too high, and will engage with
stakeholders to review the rules to ensure that taxation of pensions on death
is fair under the new system. However,
a tax charge on death is still expected to be levied.
Transfer
from Defined Benefit Pension Schemes
The Government is mindful of the
attractiveness of transferring from a defined benefit pension (final salary) to
a defined contribution (money purchase) as a consequence of the proposed
changes to how pension benefits can be accessed. The government is concerned
with the exposure to the Exchequer of an increase in pension transfers from
public service defined benefit schemes. As a consequence it intends to
introduce legislation to remove the option to transfer to a defined
contribution scheme in all but very limited circumstances.
The government is also concerned
that a large scale transfer of members from private sector defined benefit
schemes to defined contribution schemes could occur, which would have a
detrimental impact on the wider economy.
QUESTIONS & ANSWERS
Q: What exactly is the British government
consulting on?
a: The British government is
consulting on “Freedom and choice in pensions”. The consultation relates to
whether the proposed changes will happen and how. The main points which affect
investors with private pensions are:
• Ability to take unlimited income
from pensions (from age 55, rising to 57 in 2028). The first 25% remains tax
free, whilst the rest is taxed as income
• Review of the 55% tax charge on
death in drawdown/post 75
• Review of the tax rules that
prevent individuals aged 75+ from claiming pension tax relief
• Increase in minimum pension age
from 55 to 57 from 2028 and further rises after that so it remains 10 years
below state pension age.
• A consumer’s right to financial
guidance at retirement
• Potential use of (yet to be
developed) pension products for social care
Q: What is the timetable of the
consultation?
a: The consultation will close on 11
June 2014 and the government aims to confirm any changes by 22 July 2014. The
changes will potentially be effective from April 2015.
Q: Can i take my pension as a lump
sum?
a: Potentially:
• From 27 March 2014 some investors
aged 60 or over will be able to take their pension as a lump sum if:
▸ Their total pension savings are
under £30,000, instead of £18,000 (only once), or
▸ They have individual personal
pension pots smaller than £10,000, instead of £2,000, (maximum three times,
instead of twice)
• From 27 March 2014 some investors
aged 55 or over will be able to take unlimited withdrawals from their pension
(through flexible drawdown) if they can prove they have a secure pension income
of at least £12,000 a year (including state pension), instead of 20,000 a year.
• From April 2015, if the changes
above are confirmed after the consultation, everyone will be able to take their
pensions as a lump sum.
Q: What happens to investors already
in drawdown?
a: Investors who started income
drawdown before 27 March 2014 will remain on their current maximum income until
their next annual review date. If the three yearly GAD calculation is due
at that review, their maximum income will be recalculated based on the current
fund value and that month’s GAD rate. They will then be eligible to take 150%
of the new GAD limit. Clients not due a GAD calculation will simply move
from 120% to 150% of their existing GAD rate at their next annual review. These
same existing drawdown clients may potentially have their maximum income
restrictions removed completely in April 2015 if the proposed changes are
agreed following consultation.
Q: What happens to investors who
have already bought an annuity?
a: An annuity cannot usually be
cancelled once set up, so you are unlikely to have any further options.
However, you typically have 30 days to cancel (cancellation period). The start
date of the cancellation period will depend on the terms set out by your
annuity provider. Some providers are extending their cancellation period.
If you would like a free consultation to determine whether a QROPS is a suitable vehicle for your UK pension, then you can get in touch on gareth.horsfall@spectrum-ifa.com or on 3336492356.
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