In this year’s Budget the Chancellor announced major changes to pensions and potential access to your entire pension fund from age 55. Last week the Treasury announced more details on how the various changes will work from next April.
Putting the Guidance Guarantee into action
The initial statement regarding free advice for all retirees has been amended to free guidance. This same guidance will no longer be provided by financial advisers but will be provided through existing organisations such as the Money Advice Service (MAS).
As part of this guidance, customers will be given key facts about their options and consequences of any actions. It won’t however replace the personal advice you could receive by consulting an independent financial adviser (IFA).
In line with this, any person wishing to transfer monies from a defined benefit pension will have to demonstrate they have received independent advice – and in all practicality they will have to use the services of an IFA.
Accessing more than 25% of your pension fund as a cash lump sum
The Treasury has also announced the results of their consultation on ‘Freedom and Choice’ which discussed how the changes announced in the Budget would be put into action. Of particular interest rules around accessing to pension funds which are designed to give ‘Freedom and Choice’, but also protect the Treasury from abuse around tax relief.
You can, of course, save as much as you like towards your pension each year but there’s a limit on the amount that will effectively get tax relief. This is called the annual allowance, currently standing at £40,000. It has now been made clear that:
- If someone over 55 chooses to take more than the 25% of their pension fund which they’re normally allowed to take tax free, their annual allowance will be reduced to £10,000 unless their pension funds are below a specific level. This is to mitigate the possibility of tax avoidance.
- If you’ve already taken flexible drawdown you aren’t currently allowed tax relief on any contributions you pay into your pension. But from April 2015, you’ll effectively receive tax relief up to an annual allowance of £10,000 a year.
- If you’re already taking income using capped drawdown you’ll still effectively receive tax relief on contributions into your pension of up to £40,000 a year, provided you don’t take more income than you’re allowed to do under the current regulations. Exactly how this will work has yet to be confirmed. Capped drawdown won’t be available for anyone taking their pension for the first time after 5 April 2015, and anyone who draws more than their tax free lump sum will be subject to the reduced annual allowance of £10,000.
What will it mean for you?
There’s plenty to think about – and there’s no doubt that the changes to pensions will have very far-reaching effects, offering a much greater degree of freedom in the way people can choose to take their pensions.
It will also be key to see which companies and plans are willing or capable of embracing the new rules, although there will be some form of change in statutory law allowing providers to comply with the rules if they choose to do so.
At Platinum we continue to consider all your options and help our clients take advantage of the new rules. If you have any questions or concerns please do not hesitate to contact us.