Twice in the space of six months, the UK Chancellor George Osborne has created real excitement with his proposed tax changes to pensions. First, in March 2014 he announced he would scrap the requirement that a pension provides an income for life. More recently, in October 2014 he announced changes to the tax treatment of pension funds on the member’s death. In this paper, Caitlin Loynd, a pension specialist at Save & Invest takes a closer look at some of the implications of these proposed changes (which have yet to be finalised in legislation).
Q: Are these changes a positive move?
A: Yes and no. It is great to see the rules changing to accommodate what many people really need—the ability to use their pension savings as they see fit. But there is a real concern that people will think short term instead of long term. With life expectancy rising, you may need to cover living costs after you stop working for 30 years or more, and also take into account the effects of inflation. So just because people can access their entire pension pot from age 55, doesn’t necessarily mean they should. However, the improved tax treatment on death benefits will provide complete freedom to individuals to pass on their unused pension fund on their death in a more tax-efficient manner, which is great news for families.
Q: Will everyone be able to access their pension pots under the new rules?
A: Anyone who holds their pension in what is called a “Defined Contribution” plan, which can include personal pensions, group personal pensions and older pension arrangements like Section 32s, Free Standing AVCs and Executive Pensions, could use the new rules. However anyone who holds pension benefits in a “Defined Benefit” scheme, which refers mainly to employer schemes that promise a certain level of pension at retirement, will need to transfer out of that scheme to access the new flexibility, although independent financial advice would be required to do this.
Q: Will people who have already retired benefit from the new rules?
A: Definitely, provided they are in a capped or flexible drawdown arrangement, or have purchased a fixed term/temporary annuity. The new flexible access rules will apply to everyone already in such plans.
Q: Are there any drawbacks to the new flexibility for accessing your pension pot at retirement?
A: For those already in flexible drawdown, or those wanting to use the new rules after 6th April 2015 to take taxable income, future pension contributions will be restricted to £10,000pa. This could affect small business owners, entrepreneurs, and self-employed people who may wish to take flexible income from their pension savings, but continue funding their pensions from profits to reduce tax liability.
From 6th April 2015, anyone aged 55 or over will have complete flexibility on accessing their pension benefits during their lifetime (except those in final salary schemes). The entire value of a pension can be withdrawn but only the first 25% will be tax free, the rest will be taxed as income.
Clients will need to discuss options at retirement with a qualified financial adviser to find the best solution for their needs.
The “death” of annuities has been greatly exaggerated. Of course some people will elect to access more modest pension savings under the new rules, rather than buy a lifelong income. But many more will need to ensure their essential living costs are covered for “peace of mind” e.g. Council tax, utilities, food and household expenses.
For those who qualify, the new full flat-rate State Pension from April 2016 is expected to be £148.40pw but this is unlikely to adequately cover essential expenditure for most people. An annuity can still provide a risk-free means of covering such expenses for the rest of a pensioner’s life.
But there is little doubt that the annuity market will change in future—providers will have to be more innovative. For example, new lifetime annuities may allow clients to alter their level of income, or even change their minds and take the remaining fund out. But crucially, whether those already with lifetime annuities will benefit from future flexibility remains uncertain.
From 6th April 2015 any death benefits paid from a pension at the death of the member, before age 75 will be completely tax-free whether taken as a lump sum or income, or a combination of both. Even where the member dies after age 75, the remaining fund can be paid out as taxable income to beneficiaries to avoid a 45% tax charge on any pension lump sum payment after that age. It is important to understand that anyone who dies within two years up to 6
April 2015 , could potentially still benefit from this more advantageous tax treatment, since pension trustees usually have up to two years (from date of death) to pay out benefits. Finally, it should be possible for anyone to receive an income from a deceased’s pension plan, removing the need to demonstrate “financial dependency” for anyone other than a surviving spouse/civil partner or minor children.
With over 30 years’ experience providing high quality independent financial advice to our clients, Save & Invest has an experienced team of advisers based in our four offices across the UK: London, Glasgow, Edinburgh and Perth. Save & Invest is ideally placed to provide financial advice across all planning areas, including pensions, to ensure our clients have financial security in retirement as well as creating tax-efficient transferable wealth for future generations. We have invested in cutting edge back office technology which, coupled with our in-house investment research and monitoring, provides a truly innovative Wealth Management Service to our clients, across not just the UK but the globe. Our initial and ongoing costs are completely transparent and bespoke, since we treat every client as unique and requiring an individual financial solution, not a “one size fits all” approach or model portfolios.