ANALYSIS
NEWS
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THE INVESTOR
BUDGET
OSBORNE REVAMP OF PENSION RULES
Retirement is increasingly a process rather than a single event, and this will finally be
reflected in pensions legislation announced in the latest Budget.The most dramatic
change is that, fromApril 2015, individuals will be allowed to take a lump sum or draw
from their fund over a period of time, from the age of 55.There is also a significant
relaxation of the current rules ahead of that change which, the government says, will
benefit up to 400,000 people.
The government is consulting on how exactly next year’s changes will be
implemented, but chancellor George Osborne was clear about what he intends:
‘Pensioners will have complete freedom to draw down as much as they want, any
time they want. No caps. No drawdown limits.’
That marks a dramatic change from the current regime, under which anyone
drawing their pension can take a tax-free cash sum equal to a quarter of their pension
fund; withdrawing more capital than that incurs a 55% tax charge – a sizeable
disincentive.The government is proposing to cut that tax rate from 55% to the
individual’s highest marginal tax rate – which could be as low as 20%.
There are two main alternatives regarding how the remaining fund is utilised:
pensioners can either buy an annuity – which three-quarters opt for – or use
drawdown, where the investments in the pension fund are gradually cashed
in over a person’s retirement.Annuity returns are based on long-term interest rates,
though the impact of quantitative easing and the global recession has made these
very low, making them unattractive for many.
Drawdown is not a perfect solution to poor-value annuities because, under capped
drawdown, the amount that pensioners can take from their funds is restricted to a figure
that is broadly 120% of the amount an annuity on the fund would have provided.
Drawdown is not capped if the fund is enough to guarantee a pension of at least
£20,000 a year in retirement, which is known as flexible drawdown. Following the
Budget, both of these options have been made more attractive as the capped
drawdown limit has been raised to 150% of the equivalent annuity, while the
guaranteed income limit for flexible drawdown has been cut to £12,000, freeing more
pensioners to take advantage of it.
Other pension changes include increasing the small pot limits, under which investors
can take the entire fund out tax-free, from £2,000
to £10,000, and the number of small pots
permitted under these rules from two to three.
The changes – particularly the full relaxation
due next year – will greatly increase the flexibility
and transparency of pension arrangements; they
will not, however, remove the need for careful
retirement planning – indeed, investors will need
to think carefully about which option will best
suit their circumstances. For some, a combination
of lump sum, drawdown and annuities may be
the most appropriate.
The Budget also boosted the attractions of
other long-term savings vehicles with the
repositioning of ISA investment rules, which combine the current cash and equity ISAs
to give a higher limit of £15,000 a year with effect from 1 July.These can be invested
wholly in cash or shares or a combination of the two.That means investors can shelter
30% more of their equities from tax compared with the 2013/14 limit of £11,520,
making ISAs an even more attractive savings vehicle.While the new limit does not
officially take effect until 1 July, regular savers can immediately increase their monthly
payments to £1,250, while those who prefer to invest a lump sum can subscribe
£11,880 – which had been expected to be the new limit for 2014/15 – from 6 April
and top up to £15,000 in July. Limits for the Child Trust Fund and Junior ISA, available
to children under the age of 18, are also rising from £3,720 to £4,000.
A final boost for savers is the abolition of the 10% starting rate of tax on savings
and investments available to those on a low income and a rise in the threshold
determining which savers qualify for the exemption. FromApril 2015, anyone whose
total income from pensions, earnings, savings and benefits is less than their personal
allowance plus £5,000 i.e. £15,500 in 2015/16 – will be able to register for untaxed
interest from their bank.
Pensioners will have
complete freedom to draw
down as much as they want,
any time they want. No caps.
No drawdown limits
