IN YOUR INTEREST
But the new rules will mean everyone over
the age of 55 has the opportunity to choose
how and when they take their pension
bene ts.While some may still opt for the
certainty of a regular income, whether
through the purchase of an annuity or
through drawdown, others will welcome
the freedom to dip into it occasionally.
The third major change is to abolish the
55% tax, which is currently charged on
lump sum death bene ts from pension funds
being used to provide bene ts like income
drawdown. FromApril, pension funds left
by anyone dying before the age of 75 will be
free of tax if they are taken as a lump sum,
or the bene ciaries draw an income from it.
They will only be subject to tax if dependants
of the deceased choose to buy an annuity;
otherwise there will be no IncomeTax to pay.
If the death occurs after the age of 75,
there are three options, all with di erent
tax implications.The bene ciaries can take
the whole fund as a lump sum, which will
be subject to a 45% tax charge.They can
take a regular income through drawdown;
or, if they were dependants of the deceased,
they can use it to buy an annuity. In the latter
two cases, the income will be taxed at the
bene ciaries’ marginal tax rate. Lastly, they
can take lump sum income payments through
drawdown as required, which again will be
subject to tax at marginal tax rates.Assets in
pension funds at death will usually remain
outside the InheritanceTax system.
Personal pension contributions on which
you can claim tax relief are restricted to
100% of earnings, up to a maximum of
£40,000 a year, and this will not change after
April. But a new lower maximum of £10,000
a year will apply once withdrawals above the
tax-free lump sum are taken.The reduction
in the annual allowance to £10,000 won’t
apply if you enter capped drawdown before
6April 2015 (and stay within the income
limits) – but it also won’t apply if you buy
a lifetime annuity.
The government will allow those in
private sector de ned bene t schemes –
such as nal salary schemes – to switch into
a de ned contribution scheme.That could
mean you lose the very valuable bene ts that
many of these schemes have; so it is essential
that anyone considering such a step takes
nancial advice.
Indeed, in recognising that the new
system is complicated, the government
is arranging free guidance which will be
available from organisations such asThe
PensionsAdvisory Service.While‘guidance’
will explain what people
can
do, most people
want to know what they
should
do; so advice
remains essential.Among the many
issues that will need to be considered is
the balance between pension and ISA
savings. Payments into the latter do not
receive tax relief upfront, while pension
contributions have tax relief at the highest
marginal rate. In addition, ISA proceeds can
be taken tax-free, while pension income is
taxable.The reforms mean it is essential to
seek advice to nd the best balance between
the two.
The reforms may not yet be complete:
there is speculation that the quid pro quo for
giving pensioners greater freedom in how
they use their money will be a restriction
of the tax relief on pension contributions;
although there has so far been no o cial
statement on this.
There are already indications that
pension savers plan to make full use of the
new freedoms.A survey by the National
Association of Pension Funds found that
a quarter of people intended to take all
their pension in cash when the regulations
are changed.
While many of these had other income
they could use to fund their retirement, one
in ve of those planned to do this regardless
of whether they had funds elsewhere. On
the positive side, however, more than half of
those questioned – 58% – would prefer to
use their fund to generate a regular income.
That will remain the priority for many
investors, regardless of the new freedoms.
1 Pensions Policy Institute
INHERITANCE CHANGES
The changes to the inheritance rules for pensions
have attracted particular attention, with some
commentators suggesting that the scrapping of the
death tax gives significant opportunities for estate
planning. Ian Price cautions against getting too
excited by the changes. He points out that for the vast
majority of people the key objective will be to ensure
that their pension fund provides enough income for
them throughout their retirement, rather than to view
it as an Inheritance Tax saving mechanism.
A 65-year-old man, for example, could expect to
live for a further 22 years, and a woman 24 years –
that means income from a pension fund could have
to last for a considerable period
1
. Average pension
sizes also remain worryingly low: the mean size
of a pension fund used to buy an annuity was just
£38,600 in 2014, according to the Association of
British Insurers.
While that average is after any lump sums have
been taken, and excludes larger funds where the
pensioner opted for drawdown, it does highlight the
low level of pension savings in the UK – something
that these reforms, and other initiatives such as auto-
enrolment, are intended to address.
Getty Images
THE INVESTOR
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Balance sheet
With changes to pension
rules and flexibility coming into effect
from April, everyone should take the
appropriate advice to ensure they get
the right benefits.
