Treasury summarises recent pension changes
In early October 2014, the Treasury published a nine-point guide to the Government’s wide ranging pension reforms, which come into force in April 2015.
Point 1 summarises the key concept announced in the 2014 Budget, which is that pensioners will be able to withdraw as much of their (defined contribution) pension savings as they wish at any stage. These withdrawals will be taxed at no more than the individual’s marginal rate of income tax.
Point 2 highlights that 25% of a pension fund will still be tax free. Of each lump sum withdrawal, the first 25% will be tax free, with the remainder subject to income tax. Some commentators have described the ability to make unlimited withdrawals as making a pension fund similar to a bank account.
Points 3 and 4 highlight just how many people could take advantage of the reforms. Whilst the changes relate to defined contribution (money purchase) pension schemes, members of defined benefit (final salary) schemes will be allowed to transfer to a defined contribution scheme to allow them to benefit from the new freedoms. Having said that, any financial adviser recommending such a transfer must be confident that the switch is in the customer’s best interests.
Point 5 refers to the most recently announced change. There will no longer be a 55% tax on drawdown pensions or uncrystallised pension benefits passed on to family members on death. Those dying before the age of 75 can pass on their pension tax free, provided that their loved ones take the benefits as lump sums or via a drawdown arrangement. Those who die at age 75 or over can pass on their pension income to nominated beneficiaries, who will be taxed on the benefits at their marginal income tax rate. The only circumstances in which a punitive tax rate (45%) would still be levied are if the beneficiaries take lump sum benefits from a pensioner who died at age 75 or above. These changes do not apply to annuities.
Point 6 highlights the availability of free guidance for all on their retirement options. The guidance can be accessed online, over the phone or face to face. However this guidance, to be delivered by Citizens Advice and The Pensions Advisory Service, will fall short of the comprehensive advice offering which is available from a financial adviser.
Point 7 states that all pension providers will be required to make customers who are approaching retirement aware of the availability of the guidance.
Point 8 re-iterates that the implementation date for the reforms is April 2015. Anyone over the age of 55 at the time will be able to take advantage of the new freedoms from that date. People who reach the age of 55 after April 2015 will be able to take advantage of the new regime from the date of their 55th birthday.
Point 9 says that no customer needs to take any action in advance of the implementation date.
Some questions have been asked about how easy it might be for certain pension providers to facilitate these changes, but the UK’s retirement landscape is certainly about to change radically.
The UK’s financial advisers could have a vital role to play in educating those approaching retirement on their options. The changes may also make it easier to promote pension savings to younger people, who may be encouraged to learn that they will enjoy greater flexibility over how to take their benefits.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.