A quick summary of the new pension rules

March 26, 2015

We’ve referred to various forthcoming changes to defined contribution pension rules throughout our previous articles. The good news is that these changes see most people set to benefit on all fronts. But we thought it would be handy to do a quick summary for you.

So, this is what you need to know about the changes coming into force in April 2015:

1)    You’ll be able to withdraw as much of your pension as you want

This applies to you if you’re over 55 and haven’t already bought an annuity or started to draw a scheme pension. You can either withdraw the entire lot as a lump sum, or a series of withdrawals, giving you more options than the traditional ‘annuity or income drawdown’ scenario.

Sound tempting? It’s really important to remember a few things:

  • Above the first 25% (which is tax-free), your withdrawal will be subject to tax at your marginal income tax rate (0%, 20%, 40% or 45%, depending on how much you earn). Take too much in one go, and it could tip you into a higher income tax bracket for that year meaning you’ll suddenly be paying much more tax than you anticipated.  In fact, even if you are a 20% tax payer, if you take out a lump sum at the beginning of the tax year you might be taxed at 40% or 45% as it might be assumed by your provider that you are taking this amount out each month! The story here is, be careful.
  • You don’t HAVE to take it all, or even a chunk of it, just because you can. You could choose to stick with income drawdown, keeping it invested and drawing an income as and when you need it, or buy an annuity, effectively converting your pot into a guaranteed income for life.
  • You’ll still need a way to fund yourself throughout your retirement, for however many years that may be, so don’t spend it all at once! You could consider alternative investments such as property, the stock market, cash savings, or anything else that takes your fancy, but remember that these all come with their own risks and you might lose out.

And a final word of warning. This change may result in various unsavoury characters trying to get their hands on a nice chunk of your pension by offering you the moon on a stick in return. Unless you’re 100% sure that an investment opportunity is genuine, don’t touch it.

2)    Income drawdown will be available to more people

In the past, there have been requirements related to income drawdown on how much other guaranteed income you must have and how much you can take out at a time, which made this option a bit restrictive for some people. These rules are being swept away; you’ll be able to draw down as much and as often as you like.

If you’re already in income drawdown, you’ll be able to move to the new unlimited regime and draw more income that the current maximum.

Just remember those tax implications. And remember that you need to make this money last! Plan carefully, and consider taking some professional advice to make sure you don’t risk running out.

3)    Your pension is no longer subject to the ‘death tax’ if you die

In the past, if you died after age 75 or with funds in income drawdown, your pension fund was subject to a whopping 55% ‘death tax’.

  • From April 2015, if you die before turning 75, there will be no tax imposed, as long as the fund is paid out or designated into income drawdown within two years of your death, and is within your lifetime allowance. Your beneficiaries will have access to your complete pension pot.
  • If you die after 75, your beneficiaries can draw money from your pension fund with this withdrawal being treated like income and taxed accordingly
  • Or, if you die after 75, your beneficiaries can choose to take the pension fund as one lump, but this will be taxed at 45% (with the intention that this will be changed to the beneficiaries’ applicable income tax rate by 2016/17).

A quick reality check…

Recent figures from the Office for National Statistics show that, thankfully, the most common age at death in the UK for men was 86 and for women was 89 in 2011-2013. That means most of us will make it past our 75th birthday, which means that most people’s pension pots will still be subject to some tax charges on their death.

Suddenly tax planning becomes a really important consideration. So what do you need to think about?

  • Have you let all your pension funds know who you would like to benefit from your pension if you die?
  • Have you done a bit of tax planning with your family to make sure any pension withdrawals are made in the most tax-efficient way?

4)    If you don’t already have a company pension, you may be subject to auto-enrolment

The roll out of auto-enrolment has been a gradual process by the government, but it will reach even the smallest employers in 2015 and 2016.

This means, if you’re eligible (see our post on Company Pensions for more on this), your employer will automatically enrol you into a pension scheme.

You will have the option to opt out, but think carefully before you do. If this is the only pension you have, it’s probably a good idea to stick with it. There are other benefits, such as contributions from your employer and tax relief on your contributions which really do make having a company pension a sensible choice.

5)    There will be a new “flat rate” for the State Pension

This will replace the current basic and additional pensions for people reaching state pension age from 6 April 2016 – the exact figure is yet to be confirmed, but it’s not likely to be enough to buy you many of life’s little luxuries.

Whilst it’s being called a ‘flat rate’ it will still vary depending on your lifetime National Insurance contributions. It will also be impacted for some time for people with an old pension which is contracted out of some of the current state second pension.

6)    And for those in a final salary scheme…

You may be able to transfer your final salary (or defined benefit) pension to a defined contribution scheme so you can take advantage of the new unlimited withdrawal rules, as long as the scheme isn’t already in payment.

However, it’s not a decision to be taken lightly. By transferring out of a final salary scheme you may be sacrificing significant benefits, so make sure you seek advice from a professional before you take any action.

What you should do next

According to the Chancellor, George Osborne, the idea is that these changes will give you more choice about what to do with your defined contribution pension. It should make saving into a pension a more attractive option, as you can be safe in the knowledge that you’ll be able to use your savings flexibly when the time comes.

But with great power comes great responsibility (just ask Spiderman). With increased freedom, you’re being put in a position where a poor decision could have a devastating impact on your retirement prospects.

The government has committed to giving half an hour of free guidance through its Pension Wise service, which we applaud. But this will only provide broad guidance, not specific advice, and you might find that half an hour is only enough to scratch the surface as far as your options are concerned. That’s where talking to someone like us (regulated professionals who know what they’re talking about) can really pay off.

Finally though, a few parting pointers to get you taking the right action on your pension:

At any age…

  • If you don’t have a pension, consider getting one, now!
  • Review all your current pensions so you know what you’ve got and can be sure you’re getting the best deal
  • Make sure you have named beneficiaries associated with all your pension pots
  • Get some advice from a regulated professional to make sure you’ve done all you can to set yourself up for a comfortable retirement.

If you’re nearing retirement age…

  • Think about how you might like to access your money from the age of 55 and investigate all the options thoroughly – a poor decision now could cost you dearly in the future
  • Do some tax planning to make sure you’ll be using your pension money in the most tax-efficient way.

 

The value of an investment and the income from it could go down as well as up.

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

GreenSky Wealth Limited is authorised and regulated by the Financial Conduct Authority. FCA No. 629624. Registered Office as above. Registered in England and Wales, Company No. 07103441.