First step in the government’s fundamental
reforms to British pensions unveiled in Budget
2014.
Yesterday (Thursday 27 March 2014) marks the first step
in the government’s fundamental reforms to British pensions unveiled in
last week’s Budget.
Over 400,000 people who have worked hard and saved hard
all their lives, and done the right thing, will be able to access their
retirement savings more flexibly.
The
government also confirmed that people who have recently taken a tax-free lump
sum from their defined contribution pension will be given more time to decide
what they wish to do with the rest of their retirement savings and will not be
put at a disadvantage should they wish to wait to access their pension savings
more flexibly.
The Budget set out
radical plans to completely change the tax treatment of defined contribution
pensions to bring it into line with the modern world. From April 2015, we will
make it possible for people to withdraw their defined contribution pensions
savings however they wish, subject to income tax.
But
to make sure those retiring before this date don’t miss out, some changes
will take effect since yesterday. These changes will give thousands of people
flexibility for the first time and around 85,000 people much greater freedom to
drawdown their pension. The government is:
- cutting the minimum income requirement to access pension
savings flexibly (flexible drawdown) from £20,000 to £12,000, with
around more than 56,000 people now able to drawdown their pension as they wish,
subject to their marginal rate of income tax
- raising the capped drawdown limit from 120% to 150% of
an equivalent annuity, which means:
- for someone aged 65 with a pot of £100,000, they
would be able to take an additional £1830 from their pot, before
tax
- a 65 year old with the median defined contribution pot
of £44,600 would be able to take around £820 extra before
tax
- an individual contributing 8% of their salary to a
pension each year whilst earning an average salary of £25,000 from age 20
to retirement at 65 would have accumulated a pension pot worth around
£185,000. Under the new capped drawdown limit they would be able to
withdraw an extra £3,390 from their pot this year, which would then be
subject to their marginal rate of tax. Or From April 2015, they could take the
whole amount, subject to their marginal rate of tax
- almost doubling the size of the total pension savings
that can be drawn down entirely and taken as a lump sum to £30,000,
without incurring the 55% tax charge. Previously an individual with a
£30,000 pot would have had to pay taxes and charges of £21,000 if
they wished to take this as a lump sum. Now they will only pay £4,500,
leaving them £16,500 extra to invest or spend as they
wish
- increasing the size of a small pot that can be taken as
a lump sum, regardless of total pension wealth, five-fold to £10,000,
benefitting an additional 32,000 people
- increasing the number of small personal pension pots
that may be taken as lump sums from two to three. For example an individual
with three personal pension pots of £7,000, £8,000 and £9,000
will now be able to take these as a lump sum of £24,000 rather than
having to annuitise and receive around £1,300 a year
Over 400,000 people will be able to take advantage of
these changes – the 320,000 people retiring this year with defined
contribution wealth, plus those already in capped drawdown who can benefit from
the increase in the drawdown limit to 150%. The government’s wider
reforms will benefit 13 million people in Britain who have defined contribution
schemes, and the numbers continue to grow.
The
government is also changing the current rules that require people who take up
to 25% of their pension pot as a lump sum to “secure an income”
within 6 months, which is usually an annuity.
The
government intends to include legislation in Finance Bill 2014 to ensure people
do not lose their right to a tax-free lump sum if they would rather use the new
flexibility this year or next, instead of buying an annuity.
Chancellor George Osborne said:
From today, over 400,000 hardworking people will have
new choices about how to invest or spend their hard-earned retirement
savings.
The
pensions reforms in my Budget have struck a chord with many. The reaction to
the Budget reminds us all of a simple truth: when people are given more choice
over their own lives they warmly welcome it. These reforms are part of our long
term plan to create a more secure economic future for Britain.
The
government has already introduced greater flexibility and choice for people in
retirement, including by removing the requirement to convert a pension pot into
an annuity by age 75 and introducing flexible drawdown. However, most people
still have little option but to take out an annuity, even though annuity rates
have fallen by a half over the last 15 years.
That’s because if you wished to withdraw your
entire pension fund, it would be subject to a 55% tax charge under current
rules.