Tony Granger examines possible pension options following the latest changes announced in Budget 2014.
Budget 2014 was revolutionary, in that it heralded a sea change in retirement planning, with far greater flexibility in how you take your pension funds. You need never take an annuity now, and changes will allow you to take your defined contribution pension pot as cash.
However, this new total flexibility will only take effect from 6 April 2015, with interim measures announced from 27 March 2014. One must also bear in mind that the Budget 2014 announcements and Finance Bill 2014 are subject to Parliamentary approval, and much of the small print is probably yet to come.
The current system has been completely overhauled. It affects trivial commutations, the taking of ‘stranded’ small pension pots as cash and the future ability to either take a defined contribution pension fund as cash or drawdown income with more generous limits. At present, only defined contribution pension schemes (personal pensions, retirement annuity funds, money purchase schemes) are affected. Defined benefit pension schemes will still be subject to the rules of the scheme, but these may change, depending on future consultation. The taxation of pension fund cash after the 25% tax free pension commencement lump sum (tax free cash) will be taxed at marginal rates, as opposed to the previously more penal 55% ‘unauthorised payment’ tax.
Taking pension cash
Pre 27 March 2014 position
- Take 25% of your pension pot tax-free from age 55. The maximum tax free cash is 25% of the lifetime allowance (£312,500). Any cash taken over the authorised amount is taxed at 55%.
- Trivial commutation – if age 60 or over and have overall pension savings of less than £18,000, you can take them all in one lump sum.
- Regardless of total pension wealth and age over 60, you can take any pot worth less than £2,000 as a lump sum ‘small pot’. You can take two small pots.
- Income drawdown capped at 120% (if the income is taken as cash).
- Flexible income drawdown - minimum other retirement income is £20,000 (including any state pension).
From 27 March 2014
- Small pension pot that can be taken regardless of pension wealth increased from £2,000 to £10,000.
- The number of pension pots increased from 2 to 3. Three pension pots can be taken worth up to £10,000 each as cash (as opposed to two at £2,000 each).
- Trivial commutation is increased from £18,000 to £30,000 (25% tax free, 75% taxable at your marginal rate). Up to £30,000 can only be taken once.
- Income drawdown capped is at 150% (if income taken as cash) and other retirement income is below £12,000.
- Flexible income drawdown where other retirement income above £12,000 (including any state pension) is unlimited, and can be taken as cash with tax payable at marginal rates.
From 6 April 2015
- If aged over age 55, you can take your entire pension fund as cash (25% is tax free and 75% is taxable at your marginal rate). You can phase the taking of it, and do not need to take it all at once.
Comment
The new pensions regime has done much to restore confidence in the pensions system, and opened up how people take their pension benefits. Knowing that you no longer need to take an annuity (although for some, this may still be preferable), can take all defined contribution pension benefits as cash after April 2015, as well as the new rules on taking trivial commutation and small pots, make for a tidier retirement plan, and are to be welcomed.
Practical Tips:
- Make maximum pension contributions. HMRC adds 20%, so each contribution has a guaranteed return of 20% initially. The fund grows tax-free. At any time after age 55, you can take 25% tax free cash (which includes yours and HMRC’s contributions), and depending on your circumstances and timing, the balance of 75% can also be paid to you, but will be taxable.
- Find out if you have any stranded small pension pots – you could be in for a windfall!
- As always, you should seek expert professional advice based on your personal circumstances.
