George Osborne announced a ‘pension revolution’ in the 2014 Budget, which has been welcomed by many, and would give those in defined contribution pension schemes more freedom, choice and flexibility than ever before over how they access their pension savings.
Not all of the detail is set in stone, but the proposals show a clear Government desire to give pensioners more control and responsibility in their life after work. For some this epitomises pension utopia, however more choice will further complicate the retirement equation. There are also those who are concerned about ‘irresponsible’ pensioners blowing their pot on Lamborghinis on retirement and having nothing left.
Changes already in effect
Changes to pension drawdowns
Although consultation is happening over the course of the year, the Chancellor wanted to offer pensioners an immediate boost with two changes to income drawdown rules being effective from 27 March 2014:
1. Capped income drawdown limit increased by 25%
Previously, you could only withdraw 120% of the Government Actuary’s Department (GAD) basic amount each year from a capped drawdown pension fund, which is based on annuity rates (the tables are available on HMRC’s website). For pension years starting after 26 March 2014, you will now be able to withdraw 150% per annum.
2. Minimum income requirement for flexible drawdown cut
The annual secured income needed to meet the minimum income requirement to access flexible drawdown has been cut from £20,000 to £12,000, for those applying to start flexible drawdown from 27 March 2014.
These changes give pension drawdown users more flexibility to increase or decrease income to adapt to changing circumstances.
Changes to the pension triviality rules
The Chancellor announced changes to improve choice for those with small pension pots, who may otherwise have been forced to receive minimal regular pensions for life, with limited ability to shop around for the best annuity.
Firstly, the triviality limit has been increased to £30,000 from just £18,000. This means that those with total pension savings up to £30,000 or less can take the whole lot as a lump sum, known as a trivial commutation lump sum.
The Chancellor also announced a relaxation of the stranded pot rules. A stranded pot is one which is too small to buy a pension, but that the holder cannot take as a lump sum through the trivial commutation rules as they have other, larger pension pots taking them over the triviality limit.
Previously, stranded pots of less than £2,000 could be taken as a lump sum. This has now been increased to £10,000 from 27 March 2014. In addition, the Chancellor has increased the number of stranded pension pots that can be taken as a lump sum from two to three.
Changes under consultation
Allowing the breaking of pension pots
The Government is consulting on allowing those who are currently only able to take a 25% lump sum from their pension to take more. The 25% will remain tax free with the excess taxed at the individual’s marginal rate of income tax.
Changes to the 55% tax charge on lump sum death benefits
Further to the drawdown changes already in effect, the Chancellor announced a consultation on the 55% tax charge on drawdown lump sum death benefits.
The Government has plans to cut the rate of tax payable on drawdown death benefits from April 2015 to make it more closely aligned to income tax charges on drawdown. The Government has realised that having a higher rate of tax on death, than on the withdrawing of income, penalises pension savers for only taking what they need from their pension funds.
Changes to the age cap on pension contributions
As we are all painfully aware, pension ages are on the up! The state pension age is increasing to 67 in 2028, and the earliest age that you can take retirement benefits is set to increase with it to 57.
As pension ages increase and we all work for longer, the Government is consulting on removing the age cap for making pension contributions. Currently those aged over 75 are unable to make tax relievable pension contributions. The new proposals may see this cap removed.
This is the biggest shake up to UK pensions ever! If you would like more details of how your pension choices may be affected, please get in touch with your usual Hazlewoods contact.