In his March 2014 Budget, the Chancellor announced that there would be significant changes to allow individuals to have greater access to their pension funds from 2015.
The proposed changes have been consulted on during the summer and the Treasury have now published the outcome, together with draft pensions legislation, enabling the new flexible regime to commence on 6 April 2015.
The flexibility will apply to Defined Contribution (DC) Schemes such as Self Invested Personal Pensions. However, it will continue to be possible to transfer funds from certain Defined Benefit (Final Salary) schemes into DC Schemes to allow access to the new flexible rules. An Independent Financial Adviser should be consulted to consider the full implications of this course of action.
From 6 April 2015 it will be possible to withdraw 25% of the pension fund tax free at age 55, but any additional amounts will be taxed at the marginal tax rates of 20%, 40% and 45% (depending on level of income). This means that you will need to work closely with us and your pensions adviser so that we can estimate the taxation implications of the amount that you are planning to withdraw. As announced in the Budget, from April 2015 it will be possible to withdraw the whole of your pension fund if you wish. You may recall the Press suggesting that some individuals may decide to spend their pension pot on a Lamborgini!
The new pensions legislation will permit more innovative pension products, including the ability to draw lump sums from annuities and flexible annuities as well as flexible drawdown products. Under the current rules, annuities lapse upon the death of the pensioner with no value passing to the children, whereas drawdown pensions can pass to the next generation upon death (subject to a 55% charge on the fund). The Government acknowledge that this 55% charge is too high and will announce the new lower rate in the Autumn Statement on 3 December.
Note that the new pensions legislation includes anti-avoidance rules to limit “recycling”. In other words, someone over 55 might make contributions into their fund to obtain tax relief and then immediately withdraw 25% of the fund tax free. From 6 April 2015, where an individual’s fund is in drawdown, a maximum of £10,000 may be paid in each year for the purpose of obtaining tax relief.