There has been much talk in the press about the imminent pension freedom reforms and a lot of resulting confusion among the public.
A few simple points can be made to clarify some matters:
- If you have already taken pension benefits in the form of an annuity then these new freedoms will not affect you as you cannot undo the annuity.
- If you have a money purchase/defined contribution pension(s) (e.g. Stakeholder or Personal Pension, employer’s Group Personal Pension, AVC or SIPP) and you have yet to take benefits then the new rules might well appeal to you.
- If you are in capped drawdown you will be able to convert to flexi access drawdown in the future.
- The 55% tax charge on lump sum death benefits is removed – the amount of tax on death will depend on what age the pensioner dies: if it is before age 75 then the pension fund can pass to beneficiaries free of tax. If death occurs after age 75 then the payment will be subject to income tax at the recipient’s marginal income tax rate or 45% if the payment takes the form of one lump sum. The 45% rate disappears in 2016 and will be replaced by the recipient’s marginal rate of income tax.
So let’s assume you have a pension fund of £50,000 and you wait until 6 April 2015 to do anything. At this point you can buy an annuity, with or without a tax free lump sum or you can access the new flexi access drawdown where you can take unlimited ad hoc payments from your pension pot. 25% of ad hoc payments will be tax free and the remainder taxable at your marginal rate of income tax. Do not fall into the trap of thinking that you can “lift the whole pot” as one lump sum without paying tax! Annuities will still appeal to some. If you aren’t one of those people then you have to bear in mind that your pension fund has to last you for your lifetime and no-one knows how long that will be.
The upshot of all this is that is is crucial to take advice from someone before making your decision. Visit our Contact page to get in touch with us.
By David Gibson