Announced in the Chancellor’s 2014 Budget, significant changes are being proposed which will make it easier to access your pension fund pot if you have a defined contribution (money purchase) pension scheme. As a general rule, 25% of the pension fund can be taken as a tax free lump sum at age 55; although this age will be increased in future to be 10 years before State Pension age (age 57 in 2028). Remember also that the requirement to buy an annuity at age 75 had already been abolished with the introduction of “flexible drawdown” pensions that are currently available.
From 27 March 2014, the Government have increased the maximum amount you can take out each year from a capped drawdown arrangement, from 120% to 150% of an equivalent annuity. For example, if the equivalent annuity rate is 6%, up to 9% of the fund can now be drawn down each year. This is in response to concerns about low annuity rates which are linked to savings rates.
The Government has published a consultation document to consider proposals to make the drawdown rules even more flexible from April 2015. This would allow you to withdraw more than the current 25% of the fund limit, subject to a tax charge. This charge would be at your marginal tax rate instead of the current penal 55% charge on the fund.
The other significant change being consulted on is the proposal to reduce the current guaranteed pension income limit of £20,000 to just £12,000 a year. Those with this level of guaranteed pension income will be able to draw as much or as little as they wish from their pension fund each year without the 150% of equivalent annuity rule applying.
I think these rules are a great idea, but I wonder if they will be enacted in the present form. I do expect some lobbying from the insurance companies. They may lobby that the proposals will overheat an already booming South East property market as pension savers draw down large amounts from their pensions to purchase a buy to let property.
I remember the proposed changes back in 2006 when Gordon Brown was looking to allow pension schemes to invest in a residential property. The changes were scrapped as the insurance companies successfully argued that first time buyers may be unable to purchase a property as a new wave of buy to let investors used funds within their pensions to buy property.
Will it be a similar result?