Pension planning

In the Budget in March 2014, George Osborne outlined changes to the pension rules from 27 March 2014. For individuals with a drawdown pension the cap was increased from 120% to 150% of an equivalent annuity and the income limit which affects accessibility was reduced from £20,000 to £12,000 per year.  Also the limit for trivial commutation was increased from £18,000 to £30,000 and the ‘small pots’ limit was increased from £2,000 to £10,000.

However, more importantly, he also announced major changes from 5 April 2015. These have been described as “the most radical changes in pensions since the current system was introduced in 1921.”

The current rules require individuals to use their pension fund to buy an annuity or keep the funds in a drawdown arrangement. However the proposal is to give individuals the additional choice to withdraw all the funds in the pension pot and spend or invest as they wish; amazing

When do the new rules start? The proposal is that these rules start on 6 April 2015.

Who can benefit from the new rules? Individuals who have built up funds in a defined contribution or money purchase scheme. Members have to be 55 years old or more. (Members of defined benefit schemes e.g. on retirement their pension is calculate by reference to their salary, do not have an individual pension pot and cannot take advantage of these proposals.)

What will the tax position be? The first 25% of the pension fund will be withdrawn tax free, and the remaining withdrawals will be taxed as income at an individual’s marginal rate of income tax.

Time line. Watch this space. The new rules are only proposals. It is important to watch this space and see how they develop.  We all need to be aware of the following dates: The Autumn Statement will be on Wednesday 3 December; the proposed date for start of the new rules is 6 April 2015; the General Election will be on 7 May 2015. Indeed looking further ahead, in 2028 the minimum age to access a pension will be increased from 55 years to 57 years.

With flexibility comes choices, opportunities and perhaps pitfalls. Your pension pot will probably be one of the largest investments you have. When should you access your pension fund? How should you access this fund?

It is essential to speak to a financial adviser as soon as possible particularly if you are likely to retire, or wish to have access to funds (you do not have to actually retire to access funds) in the next 12 months. Our in-house IFAs David Taine and Karen Miles will be pleased to discuss your plans.