The Chancellor announced in his 2014 Budget far reaching changes to the taxation and flexibility of Defined Contribution (DC) pension schemes. From April 2015 future retirees will have a wider choice over how they use their retirement savings.
The Trustee of the RSP is currently assessing the impact of the Chancellor’s announcement on the RSP and any action that needs to be taken to reflect these changes. Please keep revisiting the IMI Pensions website to keep up to date.
We thought you may find the following information useful, although it does not necessarily apply to your RSP membership at the moment, but may help you with pension arrangements you hold elsewhere.
At the moment, the majority of people don’t have full flexibility when accessing their DC pension during their retirement – they can be charged up to 55% tax if they withdraw the whole pot.
The Chancellor announced that from April 2015, people aged 55 and over will only pay their marginal rate of income tax on anything they withdraw from their DC pension – either 0%, 20%, 40% or 45%.
You can take up to 25% of your pension pot tax-free. With the rest, you currently have 5 options.
Pension pot options
- If you are aged 60 and over and have overall pension savings of less than £30k you can take them all in one lump sum – this is trivial commutation (this was increased in the Budget from £18k)
- A ‘capped drawdown’ allows you to take income from your pension. The maximum amount you can take out each year from a capped drawdown arrangement increased in March 2014 from 120% to 150% of the “GAD” (Government Actuarial Department) Rate which is determined by long term interest rates. .
- A ‘flexible drawdown’ allows you to choose the amount that you take from your pension pot. There’s no limit on the amount you can draw from your pot each year, but you must have a guaranteed pension income of more than £12k per year in retirement (reduced from £20k per year).
- Three quarters of people buy an annuity – an insurance product where a fixed sum of money is paid to someone each year, typically for the rest of their life. These are based on several factors including age and health of the individual.
- Regardless of your total pension wealth, if you are aged 60 or over, you can take any pot worth less than £10k as a lump sum, as this classifies as a ‘small pot’ (increased from £2k). The number of personal pension pots you can take as a lump sum under the small pot rules, has increased from two to three.
If you do not satisfy the flexible drawdown criteria and withdraw all your money (after the 25% tax-free lump sum) before April 2015 you would be charged 55% in tax. From April 2015 you will be charged at your marginal rate of tax.
Who benefits from March 2014?
The changes that came into effect in March 2014 will mean around 400,000 more people will have the option to access their savings more flexibly in the financial year 2014-15.
Government plans to overhaul the system completely
From April 2015, from age 55, whatever the size of a person’s DC pension pot, it is proposed that they’ll be able to take it how they want, subject to their marginal rate of income tax in that year.
There will be more flexibility. People who continue to want the security of an annuity will be able to purchase one with some or all of their pension pot and people who want greater control over their finances can withdraw their pension as they see fit.
To help people make the decision that best suits their needs, everyone with a DC pension pot will be offered free and impartial face to face guidance on the range of options available to them at retirement.
It is important to note that the changes detailed from April 2015 are not yet law and may be subject to change. The Government has published a consultation on these changes alongside the Budget and the Trustee will update this site when further details are provided by the Government.
Who will benefit from April 2015?
From April 2015, the 320,000 people who retire each year with DC pensions will have complete choice over how they access their pension.
An annuity is an insurance product that pays taxable regular payments, for the rest of a member’s life. Annuities can be designed in a number of ways including:
- a monthly amount (fixed for life or increasing each year with inflation),
- is typically linked to an individual’s health to take account of their life expectancy,
- a protection for a surviving spouse (joint life versus single life) and a minimum payment period. For example, the policy may pay a guaranteed minimum of 5 years of payments even if the member dies soon after taking the policy out.
At present very low interest rates and increased life expectancy are leading to annuities paying historically low payments.
Whilst annuities will still be available following the Budget, members have more choice in the way they use their pension pots and are now better able to time when, if at all, they purchase an annuity.
Depending on a member’s individual circumstances by using a Drawdown pension a member may be able to delay purchasing an annuity until rates improve. The member may decide not to purchase an annuity at all, but then the member must monitor the returns the remaining pension pot is receiving to avoid running the risk of using up all of their pension pot before they die.
Budget 2014: Other Changes
- Minimum Pension Age for personal and company pensions will increase to 57 in 2028.
- Pensioner Bonds up to £10k for those aged 60 and over will be available from NS&I from January 2015.