In summary, it’s business as normal with a little added flexibility.
Changes from 27 March 2014 to defined contribution (DC) pension pots (Personal Pensions):
The changes only effect people with small pots who want benefits now…
- More people with small pension pots will be able to take them as a cash lump sum (25% tax free the remainder taxed as income).
- Under triviality the main limit increases from £18,000 to £30,000 where people value the total of all benefits they have across all contracts. – over age 60.
- The size of a small pension pot that people can take as a lump sum under triviality has been increased from £2,000 to £10,000 regardless of total pension wealth, with people being able to cash in up to three pots (previously two).
Therefore, if you plan to take your benefits in the next year and your fund is over £30,000 you are largely unaffected by the changes. You can continue to take your annuity, arrange a fixed term annuity or use drawdown with increased flexibility.
Changes to Drawdown
- Income drawdown maximum income increases to 150% of GAD tables (from 120%). This makes drawdown more attractive.
- More people will have access to flexible drawdown where withdrawals are unlimited. Currently people can only access this if they have £20,000 ‘secure’ income – that limit falls to £12,000.
Using a Fixed Term Annuity or Drawdown will allow you to access 25% of your fund as a tax free lump sum and leaves the remainder of your benefits to be accessed under the further changes proposed from 2015. Therefore, in the interim, this leaves the door open for your options.
Changes from April 2015:
- People will have complete flexibility, once they reach age 55, to take their benefits when and how they see fit. 25% will be tax-free with the remainder being taxed at the individual’s highest marginal rate.
If you are in drawdown already in April 2015 the limit on the income you withdraw will be removed. I do not suspect that many people would opt to take the balance of their fund in one go because it would incur a tax charge at their highest marginal rate and would be treated as earned income. For many this would mean a 40% tax on the fund. Leaving funds invested in Drawdown offers the opportunity to benefit from tax efficient pension growth to provide a sustainable long term income. I also think many would be happier leaving the funds in ‘pensions’ knowing they could access it freely at any time.
Our view – Annuities
While people will have much more flexibility from April 2015, many people will want at least some level of secure income for life – a hedge against living too long. Many retirees are naturally conservative so while increased flexibility may have some appeal, they will also want to make sure they have long-term guaranteed income. The reality is simple – there is no other product in the market that offers such a high rate of return for life than an annuity. And this is the reason why annuities have been the backbone of customers’ retirement income in the UK.
People will need tax planning as to how and when to take their benefits. While taking it all in one go may sound appealing on an emotional level, this means you are likely to pay more tax than taking it gradually, as and when you need it. People don’t like paying tax and so they will want to phase income over a longer period.
While the new rules will allow people to strip assets out of pensions, we have yet to see the Financial Conduct Authority’s (FCA) view on when it will be suitable to do so, and how advisers will be policed in this area. For example, the FCA is unlikely to be comfortable with money being stripped out of a pension at age 55 to be put into a bank account. With the exception of an ISA many investments outside of pensions attract tax on any gains.
This new focus on greater flexibility, and the increased focus on taking advice/guidance around options at retirement, is likely to drive many more people away from their holding provider. So while the annuity market may decrease, much of that decrease will be in the rollover market where annuities are bought with the current provider and it will have less of an impact in the external (open) market. Especially where people qualify for enhanced rates based on health and lifestyle.
- The minimum age from which retirement benefits can be drawn will increase from age 55 to age 57 in 2028. Thereafter it will increase in line with increases to State Pension Age, so that it is always 10 years below State Pension Age.
- There will be a ban on transfers from public sector defined benefit schemes to defined contribution schemes. Many defined benefit (DB) members may be attracted by the new flexibility in DC and as many of these schemes are unfunded, any mass exodus would cost the Treasury significant amounts.
- A consultation will take place to decide if there will be a ban on transfers from private sector DB schemes.
- A consultation will take place on whether to allow tax-relievable pension contributions to be made after age 75.
- The ISA limit will increase to £15,000 and there will be complete flexibility around how much is held in stocks/shares and cash. And transfers will be permitted from one type to another.
OPTIONS – USING DRAWDOWN (over £70,000 fund)
Budget Changes – April 2014
Using Drawdown keeps your options open as legislation changes…
It is proposed that from April 2015 that you can take 25% tax free lump sum and the balance (75%) can be paid as a taxable lump sum. This means you can put your entire pension fund into your bank account but you will be paying tax on the 75% of your fund at your highest marginal rate. It is taxed as earned income for that year.
Although this flexibility is welcomed, it might not be the best solution and I expect the majority of people will want to use this fund to provide a sustainable income in the long term to support their retirement.
If the 75% remaining fund is drawn immediately there is tax to pay on this. The next issue is about where these funds should be invested? Apart from your ISA allowance, the growth on investments outside of a pension is normally taxable. Leaving the money in a pension (Drawdown) invests it in a tax efficient environment; and with the new flexibility on offer it can always be drawn in full at any time. Therefore, there is no panic or rush to withdraw this fund.
If you purchase an annuity you will have a guaranteed, secure income but no further flexibility. Using a Fixed Term Annuity or a Pension Drawdown plan allows you to access your 25% immediately and keeps your options open for when the rule change is implemented in April 2015. You have complete control over this remaining investment with potential for growth and access to the fund.
Please complete our Drawdown Enquiry Form.
OPTIONS ABOUT TAKING BENEFITS BEFORE 2015
If you want to take your pension before April 2015 you have the following options:
From the 27th March 2014 if the ‘total of all your pension benefits’ is less than £30,000 you can take 25% of your fund as a tax free lump sum and the balance can be taken as a lump sum that is subject to income tax. Therefore, if your ‘total funds’ are over £30,000 you can currently:
1) Buy an ANNUITY.
After you have taken your 25% lump sum you have a guaranteed income for life and we will help you shop around for the best income.
2) Arrange a TEMPORARY ANNUITY.
You will take your tax free lump sum (25%) now and the rest is used for a ‘fixed term annuity’. This can pay an income but it doesn’t have to. There is no investment risk and the amounts are guaranteed for a minimum of 3 years.
3) Use a DRAWDOWN PLAN.
Again, you take your 25% lump sum now and the balance remains invested with the potential for growth. You can draw income from your investment. This is typically not suitable for funds of less than £80,000 to start with.
The benefit of option 2 (temporary annuity) and 3 (drawdown) is that you can access your 25% lump sum now and you will still have the option to draw the rest of your fund when the rules change in April 2015. Withdrawing your fund is subject to tax and may not be the best course of action.
Please fill in the Annuity Form and we can contact you to provide you with guidance about your options.