Pensions – Greater freedom, more choice
April 2, 2015
“The most radical changes to pensions in almost a century” were announced by the Chancellor in March 2014. Over a year later, these changes are now in place giving today’s retirees greater freedom and more choice."
The three main changes
- Ways you can access your retirement savings
- Tax payable on what you pass on to your loved ones
- Free, impartial, government backed guidance
The following applies if you’re 55 or over and have a pension based on how much has been paid into your retirement savings plan (a defined contribution pension).
1. Ways you can access your retirement savings
April 6 2015 marks a new dawn for British pension savers, with a host of new freedoms coming into effect in the way you can access your retirement savings.
What this means in reality is you’re in control of how you take your retirement income.
- You’ll still be able to take tax-free cash when you use your retirement savings to buy an annuity or go into drawdown.
- You’ll still be able to take small retirement pots of up to £10,000 as a small lump sum.
- You can take some or all of your retirement savings as cash without having to buy an annuity or go into drawdown first, if your pension company offers the option. The first 25% of each cash lump sum taken is tax-free but you’ll pay income tax on the remaining 75% through Pay As you Earn (PAYE) - just as you do when you’re employed.
The rules around accessing drawdown (where you can take a flexible income) have been relaxed making this option more accessible for many.
- From April 2015, capped drawdown and flexible drawdown will be replaced by Flexi-Access Drawdown. There will be no limit on the income you can take, and you won’t have to have other secure pension income before you can move into drawdown.
- If you’re already in capped drawdown on 5 April 2015, your plan will continue as it is unless you ask your pension company to change it or you decide to take income above your current maximum limit. If you do this, your plan will change to Flexi-Access Drawdown.
- If you’re already in Flexible Drawdown on 5 April 2015, your plan will automatically change to Flexi-Access Drawdown from 6 April 2015. Flexible Drawdown customers faced a tax charge if they pay more money into a pension plan, but once their plan has become Flexi-Access Drawdown, they’ll be able to pay up to £10,000 a year into a pension plan.
The April 2015 pension reforms have also dramatically changed the rules governing annuities, allowing greater choice about the kind of annuity which best meets your needs.
- Guaranteed periods on an annuity won’t be limited to a maximum of ten years but it will be up to annuity providers whether they want to offer a longer guaranteed periods.
- Annuity payments will be able to decrease over time rather than having to be paid at the same amount or increasing.
In addition, in the 2015 Budget, the Chancellor announced a consultation period to extend the pension freedoms to annuities allowing them to be sold on to a third party after April 2016.
2. Tax payable on what you pass on to your loved ones
The 55% tax charge payable when passing on unused pension funds after your death has been abolished which means you have a better chance of passing on your retirement savings tax-free.
The new rules
For remaining retirement savings in your plan or in drawdown:
If there’s anything left in your retirement savings plan or drawdown pot when you die, it can be used to leave a lump sum or an income to whoever you choose.
- If you’re under 75 when you die, lump sums or income will usually be paid tax-free
- If you’ve reached 75 when you die, then any lump sums will be taxed at 45% for 2015/16 tax year, and any income will be taxed as income for the person receiving it.
Before and after April 2015, income from an annuity can only be passed on to your loved ones if you choose a joint life annuity or guaranteed annuity – nothing has changed in this respect. However, before April 2015, this income was always subject to tax.
From April 2015, for joint life annuities and guaranteed annuities:
- If you die before the age of 75, this income will usually be paid tax-free to your beneficiary (the person you choose to leave income to)
- If you die after the age of 75, then annuity income will be taxed at the recipients’ rate of income tax
3. Free, impartial, government backed guidance
When George Osborne announced the pension reform proposals back in March 2014, he also gave a ‘Guidance Guarantee’. This guarantee promised that all those approaching retirement would have access to free, impartial, government backed guidance to help them make sense of their options at retirement.
This ‘Guidance Guarantee’ has now come to life as Pension Wise
This free service is available to anyone who is close to or over age 55 with pensions based on how much has been paid into their pot (a defined contribution pension).
Pension Wise provides guidance and recommendations and it won’t recommend any products or tell you what to do with your money. You can register for Pension Wise here.
[this link opens in a new window - Zurich is not responsible for content of external websites]