DIY Investor Magazine
/
2015 Issue
16
THE SIX BIG CHANGES TO YOUR PENSION:
‘RESPONSIBILITY IS THE PRICE OF FREEDOM’ (ELBERT HUBBARD)
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.
DIY Investor Magazine reported upon the changes
which are summarised below and now, with the new
found freedoms just around the corner, Steve Haysom
highlights some of the issues that have been raised in
the interim and considers some of the potential pitfalls
that come with such responsibility.
CHANGE 1: FLEXIBLE ACCESS
From April 2015 pension investors reaching or aged 55
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,
they can 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.
CHANGE 2: DRAWDOWN RESTRICTIONS
ABOLISHED
Income draw down limits are to be scrapped 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.
CHANGE 3: RESTRICTIONS TO CONTRIBUTIONS
Pension contributions are subject to a £40,000 annual
allowance and specific contribution rules. However,
after April 2015 any withdrawals from a defined
contribution pension in addition to any tax-free cash,
could result in contributions to defined contribution
plans being restricted to £10,000.
CHANGE 4: TRANSFERRING A DEFINED BENEFIT
(FINAL SALARY) PENSION
Anyone with a DB pension will be able to make
unlimited withdrawals but to do so they will have to
transfer to a defined contribution pension (e.g. a SIPP).
As very valuable benefits could be lost they will have to
receive independent financial advice first.
CHANGE 5: RETIREMENT AGE
Currently 55, the age at which you can take your
pension will increase; it will be 57 from 2028 and from
then increase in line with the rise in the State Pension
age, remaining 10 years below.
CHANGE 6: REDUCTION IN THE ‘DEATH TAX’
The Chancellor announced that pension funds paid out
before or after the age of 75 will no longer be subject
to tax at 55% and beneficiaries of those who die under
the age of 75 will not pay tax on withdrawals. A pension
provider will be obliged to tell its investors about access
to free advice and Mr Osborne announced his intention
that everyone should have free guidance to help them
make sense of their options at retirement – online, by
telephone or face to face.
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 investments decisions controlled by
the beneficial owner. Defined Benefit Scheme (DB) – a
scheme where an employee is guaranteed a proportion
of salary in retirement based on historical earnings and
length of service. Sometimes ‘Final Salary Scheme’.
