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DEFINED CONTRIBUTION SCHEME
(DC) – AN INDIVIDUAL OR GROUP
PERSONAL OR STAKEHOLDER
PENSION WHERE AN EMPLOYEE
PUTS A PROPORTION OF THEIR
SALARY INTO A PENSION SCHEME,
OFTEN MATCHED BY THE EMPLOYER.
AN INDIVIDUAL MAY CHOOSE TO
MAKE ADDITIONAL VOLUNTARY
CONTRIBUTIONS (AVCS). THE
AMOUNT ACHIEVED IN RETIREMENT
IS DEPENDENT UPON THE
INVESTMENT PERFORMANCE OF THE
PENSION SCHEME.
SIPP – A SELF-DIRECTED PERSONAL
PENSION WITH CONTRIBUTIONS
AND INVESTMENT DECISIONS
CONTROLLED BY THE BENEFICIAL
OWNER.
DEFINED BENEFIT SCHEME (DB) –
OFTEN KNOWN AS A ‘FINAL SALARY’
SCHEME WHERE AN EMPLOYEE IS
GUARANTEED A PROPORTION OF
SALARY IN RETIREMENT BASED ON
HISTORICAL EARNINGS AND LENGTH
OF SERVICE.
From next year Britons will
enjoy much more freedom to draw
on and spend their pension assets.
This is good news for many of us but
requires planning. Here is the low-
down on the proposals.
George Osborne’s March 2014
Budget shocked the pensions industry,
handing more control over to pension
savers and removing the need to buy
an annuity - the most radical changes
to pensions in almost a century.
On July 21st the Government
confirmed the changes and on
15th October published its landmark
pensions reform Bill in the House
of Commons. Ros Altmann, the
Government’s older people’s tsar,
said: ‘It means people can use their
pensions as a bank account. People
will be free to access their money
freely as they need to, rather than
being forced to buy particular
products’ But what does it all mean for
those of us planning for retirement?
Here are the key changes to consider:
1: FLEXIBLE ACCESS
From April 2015 pension investors
reaching or aged 55 will have total
freedom over how they take an
income from their pension up to, and
including, taking the whole fund as a
lump sum. Freed from the requirement
to purchase an annuity (a scheme
which pays a regular income), they will
be able to spend, invest or save it as
they prefer.
The first 25% is tax-free with the rest
subject to income tax at the highest
marginal rate. Income taken from
the pension is added to any other
income an individual has – e.g. salary
– which could drive basic rate (20%)
tax payers into the higher (40%) or
even top-rate (45%) income tax band.
Such a tax liability could be managed
by making staged, rather than a
single withdrawal, or it should also be
possible to take a tax-free lump sum
straight-away and taxable income at a
later date.
Investors aged 55 in April 2015 in
Defined Contribution, SIPP and some
Additional Voluntary Contribution
schemes should be able take
advantage straight-away.
2: DRAWDOWN RESTRICTIONS
ABOLISHED
In retirement, investors currently have
the option to draw an income directly
from their pension fund, known as
income draw-down, up to an annual
limit known as the Government
Actuary’s Department (GAD)
maximum; from April 2015 these limits
will be scrapped.
Using income draw-down the
pension fund remains invested and
the individual chooses where to
invest, how much income to take and
potentially when to pass funds on to
an heir. Such flexibility comes with
greater risk than a secure income
such as an annuity and the individual
assumes responsibility that they will
not run out of money in retirement
either due to poor investment
decisions or by taking excessive
income. Investors aged 55 or over with
a DC, SIPP or AVC scheme can benefit
from April 2015 and those already in
income draw-down prior to 6th April
2015 will be able to benefit from the
new regime.
TALKIN’ BOUT A REVOLUTION
DIY INVESTOR MAGAZINE’S GUIDE TO PENSION REFORM
