Posted by admin - April 10, 2014 2:17 pm
Pension Changes
The Chancellor has announced a range of significant measures to bring greater flexibility to individuals who want to access their funds in defined contribution pension schemes. Some of these changes came into effect on 27 March 2014 but others are planned, subject to further consultation, and will follow in April 2015.
Current measures
The measures which were introduced in March cover four broad areas:
1) Capped drawdown
An individual aged 55 or over can opt for a drawdown pension which allows them to extract amounts from the pension fund which is then treated as income for the relevant year. The maximum amount of drawdown is fixed to ensure that the fund is not cleared too quickly. The cap is based on 120% of a national annuity rate set by the Government Actuary. The cap will be increased to 150%.
2) Flexible drawdown
Where an individual aged 55 or over can demonstrate that they have pension income (including the state pension) of £20,000 per annum or more they can ignore the drawdown cap and can take whatever amount they wish. Tax will be payable at their marginal rate. The income limit is to be reduced to £12,000 per annum.
3) Trivial commutation
At present an individual aged 60 or over who has total pensions savings of £18,000 or below can withdraw this as a lump sum. The limit will be increased to £30,000.
4) Small pots
The Government will increase the amount for small individual pension pots that can be taken as a lump sum regardless of total pension wealth from £2000 to £10,000. They will also increase the number of small pension pots that can be taken as lump sums from two to three.
Pension changes yet to come
The Government plans to bring even greater flexibility into the pension system from April 2015. In effect an individual will be able to choose what they want to do with their defined contribution pension fund:
- If they want to draw out their entire fund on retirement they will be able to do so. The tax free element will be 25% of the sum and the balance will be taxed as income in that year.
- If they wish to buy an annuity they will be able to do so.
- If they wish to opt for a drawdown arrangement they will be able to do this without any restriction either in the form of a cap or a minimum income limit.
These changes will be subject to a consultation.
Two other important changes will be made:
1) Pension providers and pension trustees will be required to provide free and impartial advice to all individuals approaching retirement do that they can make an informed choice of the opinions made to them.
2) The minimum retirement age for pension schemes will rise to 57 years in 2028 when the state pension age rises to 67 years.
Pension liberation
The Government is concerned about schemes which are intended to encourage people ton access their pension funds before they reach retirement and use the funds for other purposes. A range of measures are being introduced to combat these schemes.
With effect from 1st September 2014 a further measure will be introduced to allow HMRC to refuse to register pension scheme where they believe that the scheme administrator is not fit and proper and the scheme has been established for purposes other than providing pension benefits.
Comment
The Government has clearly indicated that they want individuals approaching retirement to have more flexibility and that these individuals can be trusted to make their own decisions as to what to do with their pension funds and not to be restricted, therefore, by legal requirements.
However, with the greater range of options and increased flexibility these changes will result in it is now more important than ever that individuals approaching retirement age seek out professional advice from both pension providers and tax specialists in order to obtain the right advice.
If you would like more information about this issue then please contact your local MFW office.
