New rules for pensions-retirement income
The March 2014 budget heralded a massive shake-up of UK pensions. The announcement was that from April 2015, anyone of pension age could draw as much from their defined contribution (or ” money purchase”) pension pot* as they choose. The 25% tax-free allowance (pension commencement lump sum – “PCLS”) remains in place, with the balance to be taxed as income in the tax year that it is taken.
The proposals are still subject to consultation, but it is anticipated they will proceed as planned.
For most people, this massive increase in flexibility of withdrawals from pension funds is welcome. It means that larger sums can be taken and utilised for, for example:
- Pressing financial needs, such as repayment of a mortgage or other loans.
- Expenditure on major items in amounts greater than the PCLS would have allowed.
- Gifting of funds to relatives – e.g. helping children get on the property ladder, or even gifting for purposes of IHT mitigation.
So, the former overriding principle that the pension fund remaining after PCLS must be utilised such that it provides an income throughout the rest of the pensioner’s life (either through an annuity or via capped drawdown), has been done away with. Now, you may exhaust your pension fund as rapidly as you like, although doing so too rapidly may move you up into a higher tax band.
Considerations for those who may retire imminently:
Since the new regulations will not take place before April 2015, the Chancellor announced two immediate changes to the income drawdown rules to apply in the interim, to assist people retiring now:
GAD limits: the Government Actuarial Department sets withdrawal limits on capped drawdown schemes. For all existing capped drawdown plans, the existing limit shall increase from 120% to 150% of the GAD basis amount for all income years starting after March 26, 2014., people with existing plans need to wait until their next anniversary before the limit applies.
Flexible drawdown minimum income: Flexible drawdown has been available for some years now, but only to persons whose minimum guaranteed income in retirement was at least £20,000 per annum gross including state pensions (and already in payment). This minimum income limit has now been reduced to £12,000 for those wishing to start flexible drawdown after March 26, 2014.
These new limits will of course become redundant in April 2015 when complete flexibility of withdrawals will begin to apply regardless of size of funds or levels of alternative income.
Other: Existing triviality limits have been extended in advance of April 2015. From age 60, individuals with total pension savings of £30,000 or less may take it all as a trivial commutation lump sum. Additionally, small “stranded” pension pots of up to £10,000 can be taken as a lump sum – an increase from the current £2,000, and the number of such pots that can be taken as a lump sum is increased from 2 to 3.
Some individuals could therefore achieve up to £60,000 through trivial commutation (one needs to take the stranded pots first. If they do not already exist they can be created by making contributions to new plans! (subject to relevant earnings)).
55% Drawdown death benefits tax charge may be reduced.
Presently, when a person taking income through an income drawdown plan dies, the plan can be taken over by a spouse or dependent relative with no particular tax charge at that point. But upon second death (or first death where no spouse or dependent relative election applied), the remaining fund could be distributed to beneficiaries only after a 55% tax charge. This level of charges now under consultation, and may be reduced to a fairer level of tax more closely aligned to the policyholder’s former rate of income tax.
This all leads to a greater need for sensible advice to retirees prior to taking their retirement benefits. Whilst the Chancellor has promised “free advice for all” (which soon became “free guidance for all”) this will probably only be a telephone conversation with the reirees pension company, or similar. As an independent adviser I will look at your income needs, tax position, spouse and dependents needs, other investments and help you formulate a sensible, sustainable plan for a long and hopefully healthy retirement. You can’t beat good independent advice.
*The terms “defined contribution” or “money purchase” apply to pretty much all occupational and personal schemes which are not “final salary”.