IMPORTANT CHANGES TO PENSIONS
1. Minimum pension age and flexible access to using a pension to provide a retirement income
From April 2015, pension investors aged at least 55 have complete freedom over how they take an income from their pension. However, the age at which you can draw your pension is set to increase and will be 57 from 2028, with the minimum pension age rising in line with the state pension age.
If you retire after April 2015, you won’t need to buy an annuity to access the remainder of your fund. Instead you can choose to take the whole fund as one or more lump sums. (Generally only 25% is tax-free and the rest will be taxable).
Why have the changes been introduced?
The changes will give pension plan holders more flexibility over how they access their money.
How will the changes affect your plans?
This depends on which point you have reached; whether you are about to retire, or have already retired and have an annuity being paid to you. Investors aged over 55 or over in April 2015 were able to take advantage of the new flexibility straightaway.
What’s best for you will depend on your own circumstances and the best thing to do would be to seek professional financial advice if you’re in any doubt.
2. Pension Income (drawdown) limits and restrictions
The maximum income from capped drawdown has increased. From April 2015, there is no limit on how much income you can take. Using income drawdown, your pension fund remains invested and under your control. You choose how much income to take, and where to invest. This allows for additional flexibility over when you take income but this is a higher risk option.
3. Smaller pension pots
The Government has increased the small pension fund limit where you can take it all as a cash lump sum, subject to tax from the age of 60. If you are aged 60 or over and have less than £10,000 in a single pension fund You can take it as a lump sum regardless of any other pension funds you may have. If you have personal pension funds, you can now do this to a maximum of three times on funds that may be held with the same or different pension providers. You could previously only do this two times.
If you are aged 60 or over and the total of all the pension funds is valued at less than £30,000, you can take them all as a lump sum (the previous limit was £18,000). Certain conditions apply and the best thing to do would be to seek professional financial advice if you’re in any doubt.
4. Changes to how much you can contribute to your pension
If you take any income from your pension (in addition to any tax-free cash) from April 2015, you may still be able to make pension contributions, but only up to a reduced annual allowance of £10,000 a year. This includes employer contributions and pension benefits being built up in final salary schemes, which can be surprisingly large. There are two exceptions:
If your pensions is worth less than £10,000. In this case, you will be able to make withdrawals from 3 small personal pots and unlimited small occupational pots worth less than £10,000 each without being subject to the £10,000 allowance.
If you went into a capped drawdown scheme before April 2015 and your withdrawals after April 2015 remain within your drawdown limit. In this case you will not be subject to the new £10,000 allowance.
5. Transferring a defined benefit pension (e.g. final salary)
Anyone with a defined benefit pension (e.g. a final salary scheme) may take advantage of new flexibilities and make unlimited withdrawals. Certain conditions apply and you would need to seek professional financial advice if you’re considering making withdrawals or transferring money from a defined benefit scheme into a defined contributions scheme.
However, the vast majority of public sector workers including NHS workers will be blocked from transferring their pensions.
6. Access to impartial ‘Guidance’
Everyone should have free guidance to help them make sense of their options at retirement. Guidance is provided by organisations including The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). This guidance is unregulated and the FCA said ithat: “Guidance does not replace financial advice given by regulated advisers.
To discuss anything in this factsheet with a Financial Adviser, please contact us and our team will offer friendly support, encouragement and help find answers to your retirement and pension questions.
When any further details and draft legislation is published, our understanding could change.
Tax treatment can change and will be dependent on your individual circumstances.
Please remember, taking money out of a pension will impact standards of living in retirement. This factsheet is not advice.
The value of investments call fall as well as rise so you may get back less than you invest.
Sources - “Freedom and Choice in Pensions: Government response to the consultation” document, dated July 2014.