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THE INVESTOR
IN YOUR INTEREST
T
he pensions industry is in the
throes of a revolution.Awave
of reforms taking e ect in
April will bring more
exibility to everything, from
the way bene ts are taken to what happens on
death.They will a ect everyone with a de ned
contribution pension, and everyone should
seize the opportunity to review their retirement
plans to make the best of the changes.
These reforms apply only to those with
de ned contributions schemes, where a set
amount is paid into the fund and the bene ts
depend on the amount accumulated.The
reforms touch all the key areas of pensions:
the tax-free lump sum; how income can
be taken from the fund on retirement; the
so-called‘death tax’ on pensions left in an
estate; and the level of contributions that can
be made after some funds have been drawn
from the pension.The impact of all four will
be far-reaching.
Ian Price, divisional
director for pensions
at St. James’s Place,
says:‘These changes
mean that, fromApril,
everyone with
a de ned contribution
pension will have far
more choice about
how they take their
pension bene ts. But the decisions about how
to use these freedoms are not easy ones and
it is essential that everyone takes appropriate
advice to ensure they opt for the right solution
for them.’
Most pension funds allow their members
to take a tax-free lump sum of up to 25%
from their fund.
The rst reform means that, fromApril, it
will be possible to withdraw amounts directly
from the fund without having to enter
drawdown or buy an annuity, with a quarter
of each such payment being tax-free. For
example, someone with a £100,000 pension
pot could choose to take £25,000 at once, with
all subsequent withdrawals taxed as income; or
they could take 10 payments of £10,000 each,
with £2,500 of this paid free of tax.
That could be an attractive option for those
who do not need a large sum of cash. Not only
does it allow some tax planning, it also means
that the funds remain invested in the pension
for longer, potentially earning greater returns.
That brings us to the second reform:
the scrapping of restrictions on using
‘drawdown’ – taking a regular income from
your pension while leaving it invested.The
current system has nancial constraints
regarding the maximum amount that can be
drawn from pension funds.
FromApril, there will be complete
freedom over how to take bene ts, from
taking the whole fund at once (dubbed
the‘Lamborghini
option’ after pensions
minister SteveWebb
said individuals were
free to blow their
retirement savings on
one if they wished),
to taking lump
sums as required,
or drawing a regular
monthly income.
But the objective of a pension fund should
be to provide regular income in retirement;
so withdrawing everything is likely to be
sensible only if the funds are small, or in
exceptional circumstances.
There are tax implications to be
considered: any amounts withdrawn over
the tax-free lump sum described above will
be taxed at the marginal rate, so a basic rate
taxpayer will pay 20% tax; but if the pension
withdrawal pushes income to higher levels, it
will be taxed at 40% or 45% as appropriate.
Everyone will have
far more choice
about how they
take their pension
benefits
PENSIONS
