Pensions – Freedom & Choice
“The most radical changes in a century” – What do the new rules mean for you?
In his March 2014 Budget, Chancellor George Osborne introduced “the most radical changes to pensions in almost a century”. The new measures come with extensive implications for an estimated 18 million people in the UK who have pension plans.
It has been estimated that as many as ‘one in eight’ pensioners may seek to withdraw all the funds in their pension. In his speech, George Osborne clearly underlined the need for expert advice whatever your stage of life in order to benefit from the changes and ultimately enjoy a comfortable retirement. It should be noted that as the median pension pot is around £12,500, the advice which will be freely available to the average person will be necessarily limited.
Traditionally, those retiring with their own pension funds purchased annuities. However, annuity rates have fallen dramatically over the last few years. This is due partly to a rise in life expectancy but more recently because of the lowering of interest rates during the recession, which contributed to a reduction in gilt yields upon which annuity rates are based. Those with larger pension funds had more options, such as flexible drawdown, but restrictions still applied.
The common belief was that change was overdue.
Some things have not changed in that there are still restrictions on how much you can save in each year and over your lifetime – this rule must never be forgotten!
Some changes have already come into effect. The limits on how much people can draw from their pension each year have been relaxed since March 2014.
From April 2015, the following changes came into effect…
Flexible access from age 55
Pension investors aged at least 55 (rising to 57 from 2028) will be able to access their pension fund as a lump sum if they wish. The first 25% will be tax free and the rest will be treated as taxable income and will be subject to income tax at their marginal income tax rate.
Basic-rate tax payers need to be aware that any income drawn from their pension will be added to any other income received, which could result in them paying tax at 40% or even 45%.
You can also choose to take your pension in smaller lump sums, spread over time, to help manage your tax liability.