Budget 2014: What do the pension changes mean?
The announcements made in this week’s budget set out some of the biggest changes to UK pensions for a generation.
Up until now, it has only been possible to draw an income from a pension by the way of a fixed income for life (an annuity) or by taking income withdrawals within prescribed limits (income drawdown). Taking the whole of a pension as a lump sum has only been available under flexible drawdown rules subject to already having a minimum level of income. For those that don’t meet these criteria, lump sum withdrawals have been heavily discouraged with a punitive 55% tax charge.
These rather inflexible and restrictive ways in which pensions could be accessed meant that many savers may have been discouraged from investing in pensions for their future retirement. The government has recognised this and along with auto-enrolment these new reforms are aimed at getting people saving for their own retirement and being less dependent on the state in their old age.
The changes, which will take full effect from April 2015, mean that in addition to the options available today retirees will now have the opportunity to withdraw lump sums from their pensions without limit, regardless of their level of income, to do with as they please. A quarter of it can be taken tax free as it can under the current rules, with the remainder taxed at the individual’s marginal rate of income tax.
Some have argued that a relaxation of the rules will lead to many blowing away their pension savings on frivolous things like cars & round the world cruises leaving them penniless and looking back to the state for help and support – exactly what the government are trying to get away from. Of course, there will be a large boost for the tax coffers. The full effects remain to be seen in the years ahead.
As an interim measure, for anyone retiring after 27 March this year but before the new rules take effect next April, a number of current limits are being relaxed. From the end of this month it’ll be possible to cash in small pension pots valued up to £10,000 or all of an individual’s pension pots if the total value of all pots is below £30,000. Also the maximum income available from drawdown will increase.
Overall, the changes highlight the growing need for financial advice. Most of us will only get one opportunity to choose the right retirement option and making the right choice is going to be more important than ever.
Please contact us for a free, no obligation, initial consultation to discuss your retirement plans.