George Osborne announced radical changes to how pension benefits could be taken and how pension death benefits would be taxed as of April 2015 in the March Budget at the September party conference and in the Autumn Statement. These changes were set out in the Taxation of Pensions Bill which received Royal Assent on 17 December 2014.
The following explains how they will affect you from April 2015
Flexible access to pensions from age 55
Pension investors aged at least 55 will have greater freedom over how they take benefits from their pension. They can choose to either:
- continue to take a regular income via income drawdown or an annuity;
- take smaller lump sums, as and when they like; or
- withdraw the whole fund in one go.
Freedom over how investors take tax-free cash
Currently, pension investors who want to take their pension as a lump sum can only take 25% of their pot tax-free. The remaining 75% can then be placed in a drawdown account or used to buy an annuity - where any income taken out is taxed at their marginal rate.
Under the changes, individuals will also be given the option to take a series of lump sums from their pension fund, 25% of which will be tax-free and 75% taxed at their marginal rate of income tax. This should help investors manage their tax liabilities, while undrawn pension funds can remain invested in a tax-efficient environment.
Transferring a defined benefit pension to a flexible Arrangement
Anyone with a private sector defined benefit pension will be able to take advantage of the new flexibility but, to do so, they will have to transfer to a defined contribution pension (e.g. a self-invested personal pension (SIPP)) and demonstrate that they have taken financial advice before doing so. Those in unfunded public sector schemes will not be allowed to transfer to a flexible scheme.
£10,000 reduced annual allowance
A reduced annual allowance of £10,000, when making pension contributions, will apply when someone accesses a new flexible drawdown scheme and in other scenarios, two of which are highlighted below.
- Taking out a 'flexible annuity' which allows, or could be varied to allow, decreases in the amount of annuity (over and above the existing rules on decreases to lifetime annuities).
- Becoming entitled to a scheme pension from a money purchase scheme where there are fewer than 11 other people entitled to payment of scheme pension under the scheme.
Tax-free cash recycling
Rules exist to prevent someone from taking tax-free cash from their pension and making a fresh pension contribution which attracts tax relief. The Taxation of Pensions Bill 2014 reduced the limit from 1% of the lifetime allowance, measured over a 12 month period, to £10,000. This has been cut further to £7,500 in the Act which received Royal Assent on 17 December 2014.
55% pension 'death tax' to be replaced
Currently, it is only possible to pass a pension on as a tax-free lump sum if death occurs before age 75 and the pension remains unvested, i.e. no tax-free cash or income has been taken. In all other cases, lump sum death benefits are liable to a 55% charge.
As of April 2015, the tax treatment of pension funds on death will depend on the member's age on death and the form in which the death benefits are taken.
- If death occurs before age 75, beneficiaries will be able to receive a lump sum completely tax-free whether the fund is unvested or in drawdown. It will also be possible to draw down funds in tranches from a pre-existing drawdown scheme, free of tax. Furthermore, income payable to a dependent under a joint life annuity will not be taxable, nor will income or capital arising under guaranteed term pensions.
- If death occurs after age 75, beneficiaries will have two
options, either:
- to receive a lump sum, subject to a 45% charge in 2015/16, falling to the beneficiary's or beneficiaries' marginal rate of income tax from 2016/17; or
- nominated beneficiaries will be able to access the pension fund flexibly, at any age, and pay tax at their marginal rate of income tax on withdrawals.
Other headlines
Retirement ages to increase
The age at which you can draw your pension, currently 55, is set to increase to 57 from 2028 and thereafter it will remain ten years below the state pension age. This change will not apply to public sector pension schemes for firefighters, police and armed forces.
Protected low pension ages
Restrictions on transferring pensions with a protected low pension age are to be lifted. It will be possible to transfer to a new scheme and continue taking income while still below age 55, without it being part of a block transfer.
Guidance guarantee
All members of defined contribution pension schemes must be given access to guidance on their options as they reach retirement. This will be provided by The Pensions Advisory Service online and face-to-face by Citizens Advice and will be generic in nature. Those who want specific advice will be referred to a financial adviser.
Important information
High income withdrawals may not be sustainable in the long term. Taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken which could result in a lower income in the future.
We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
