By now you are sure to be aware that the Government has announced the biggest changes to pensions, since …… well since the introduction of pension’s decades ago. The aim of these changes is to give people the freedom and flexibility to choose how they access their pensions from April 2015.
For decades, successive Government’s have encouraged most people to purchase annuities (a certain income for life) with their retirement funds. More recently annuities have often provide a low level of income and the pension fund could potentially be lost after an individual dies. The changes will give people more choice with the money they built up in their pensions.
Before anyone thinks that the only options, with regarding to taking pension options will exclude traditional methods of taking income, I am confident that some people will still choose an annuity over the new options and indeed annuities will still have a significant part to play in the provision of income in retirement. The concept of an annuity, is not necessarily a bad idea, it is just that the rates are not offering the value which we would like. We are sure that annuities are far from dead and will continue to be used either entirely or in part for some people’s pension funds.
PENSIONS UNLOCKED from April 2015
The new rules will offer people far more flexibility in how they use their pension funds, whether to draw a lump or to provide an income. The size of your pension pot is no longer relevant for individuals aged 55 or over in April 2015. You will have complete freedom on how much they can draw out of your pension, and when you choose to do it. There are no limits or restrictions set by the Government and individuals will only pay their marginal rate of income tax, whilst still benefiting from taking up to 25% of your pension pot tax free. So anything more than the 25% lump sum may attract 20%, 40% or 45% income tax (based on current tax rates).
INHERITANCE TAX position will be a great deal better
The new pension rules will also potentially improve people’s Inheritance Tax positions. Previously, once you started taking money from a pension pot, any amount left when you died would be taxed at 55%. Around 320,000 people retire each year with defined contribution pension savings; these people will no longer have to worry about their pension savings being taxed at 55% on death. From April 2015, anyone who dies before aged 75 will be able to give their remaining defined contribution pension to anyone completely tax free, whether it is in a drawdown account or untouched as long as it is paid out in lump sums or is taken through a flexi access drawdown account. It is important to be aware that this does not apply to annuities or scheme pensions.
Those aged 75 or over when they die will be able to pass their defined contribution (money purchase) pension to any beneficiary who will then be able to draw down on it at their marginal rate of income tax. Beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45% (if the deceased was over 75). The Government intends to also make lump-sum payments subject to tax at the marginal rate (not a flat rate charge of 45%).
IT’S NOT ALL FREE – other tax considerations
There are other tax implications that need to be considered. If you take out your pension pot as a lump sum, or empty your pension pot in the first few years, although you will receive 25% tax free, you will have to pay a marginal rate of income tax on it depending on the amount, either 0%, 20%, 40% or 45% which could amount to more tax paid than if you gradually paid yourself an income over 20 years.
It is therefore, important that you obtain professional advice from a financial adviser to establish the most appropriate method of obtaining your retirement income. It is also important that you consider the implications of funning out of money. The last thing that want to happen is to have to go back to work at age 75 because you have exhausted your pension fund and your other income is insufficient to maintain your lifestyle. Other factors, such as inflation should be taken into consideration as the value of money will reduce over time; so having enough income now may not be sufficient in the future. The objective is to ensure that you to take a level of income that does not use up your entire pension fund whilst also trying to ensure that also do not under spend; not an easy question to answer.
Undoubtedly, the flexibility and freedom of the new rules to pensions can benefit you, however it is also important to be aware that if you spend your entire pension fund too quickly and find that you are then living off the state pension and other non pension investments, you may have to consider returning to work. Planning ahead for your retirement income will be very important especially as average life expectancy continues to rise and you may find that you longer in retirement than you were working and earning.
This article does not provide specific advice and you should always seek professional advice from a qualified adviser before making any decisions.
Contact Martin Dodd on 01902 742221 or email him at [email protected] if you would like talk about money issues.
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