The Budget hailed changes which are sure to affect your retirement planning.
“Let me be clear. No one will have to buy an annuity” were the surprise words in this year’s Budget speech. However, legislation and administrative systems cannot be changed overnight, so we are now in a two stage process:
1. Finance Bill 2014
The Bill makes interim pension tax changes to defined contribution (DC) pension arrangements (such as personal pensions and money purchase occupational schemes, but not final salary schemes), including:
- The limit for capped income withdrawals – making withdrawals from your retirement fund to provide an income – is increased from 120% to 150% of the broadly equivalent market annuity rate for new plans and from the next drawdown year for existing arrangements.
- The minimum secure income (broadly state pension, occupational pension or pension annuity) for flexible withdrawals has fallen from £20,000 a year to £12,000 a year, giving you full access to your pension fund, with no cap on withdrawals.
Your pension providers must now make their own system and rule amendments, so you may not be able to benefit from them all immediately.
2. Finance Bill 2015 and beyond
A Budget consultation document covered other pension changes, some of which are destined for next year’s Finance Bill, including:
- The introduction of full pension flexibility for defined contribution schemes from 6 April 2015. This would scrap the £12,000 minimum income requirement. The tax-free lump sum of up to 25% of the fund would remain, with the rest of your fund taxed as income.
- The treatment of benefits on death may change, with the tax rate payable on lump sum payments of drawdown funds remaining at death reduced from the current 55%.
- The minimum age from which you can start drawing benefits from your pension is likely to increase – a change that would affect all private pensions.
These radical reforms will almost certainly mean that your retirement planning needs to be reviewed. In a world with much greater flexibility, both pre- and post-retirement strategies can look very different.
Will you get the correct advice? Look at these two headlines from today …
• From the BBC website 7th August 2014 – An estimated 130,000 retirees a year will take cash out of their pension pot under new flexibility rules, the UK tax authority has estimated
• HM Revenue & Customs (HMRC) has predicted that it will collect an additional £4 billion of income tax by 2020 as people make larger withdrawals in the earlier years of retirement, which would bring forward the tax impact of their retirement income.
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Please Note: The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax and pension laws can change. The Financial Conduct Authority does not regulate tax advice.
