Radical changes proposed in the Budget (19 March 2014) could herald the biggest shake-up to UK pensions ever. And it is set to come into force in April 2015. These welcome proposals would give a defined contribution pension saver more freedom, choice and flexibility than ever before over how you access your pension savings.
- If the changes go ahead, once you reach pension age you would be able to draw as much (or as little) from your defined contribution pension pot as you choose at any time.
- 25% would still be tax free. The balance would be taxed as income in the year it's taken.
The detail isn't set in stone. But this signals a clear Government desire to give savers more control, and responsibility, over their destiny in life after work.
Drawdown limits amended
The chancellor has announced two changes to income drawdown rules which were effective from 27 March 2014:
- Capped income drawdown - limit up 25%: The maximum yearly income allowed under the pension capped drawdown rules will increase by 25%, from 120% to 150% of the GAD basis amount, for income years starting after 26 March 2014.
- Flexible income drawdown - MIR cut to £12k: The yearly secured income needed to meet the ‘minimum income requirement' to access flexible drawdown will be cut from £20,000 to £12,000 for those applying to start flexible drawdown after 26 March 2014.
Taken together, these changes give pension drawdown users even more flexibility to amend income up or down to adapt to changing circumstances.
The government have also proposed that:
- Those in flexible drawdown will receive a new annual allowance of £10,000 from April 2015.
- Those who access more than their tax free cash from a defined contribution scheme will have an allowance of £10,000 for future contributions. This only applies if a pot in excess of £10,000 is accessed.
- Those in capped drawdown prior to April 2015 will not be restricted to an annual allowance of £10,000 unless they withdraw more than the capped amount.
Pension triviality limits increased
The Chancellor announced changes to the pension triviality rules from 27 March 2014:
- Triviality limit up to £30k: Individuals over age 60, with total pension savings of £30,000, or less can take it all as a trivial commutation lump sum - the current limit is just £18,000;
- Stranded pot rules relaxed: Small stranded pension pots of up to £10,000 can be taken as a lump sum - a significant increase from the current £2,000. And the number of small stranded personal pension pots that can be taken as a lump sum is increased from two to three (not subject to the annual allowance of £10,000)
These changes improve choice for more consumers who may otherwise have been forced to receive very small regular pensions for life, with limited ability to shop around for the best annuity. In both cases, up to 25% of the lump sum can be paid tax-free with the balance taxed as income.
Annuity rates depend on your individual circumstances, such as health and lifestyle factors as well as rates available at the time of purchase.
55% Drawdown Death Benefits Charge Set To Be Cut
On 29 September 2014 the Chancellor announced the proposed changes to the death benefit tax charge on pension funds, which was a head of the expected announcement in the Autumn Statement. A summary of the proposed changes is as follows:
Who does this apply to? Anyone who has a defined contribution pension - where their contributions build up in a pot, which is then used to buy a retirement income. This includes most auto-enrolment schemes.
How will the changes affect those who die before the age of 75? From April 2015, anyone who inherits a pension fund will have no tax to pay - whether it is already being used or not. They will not be liable for income tax either. But there will still be a limit of £1.25m on the amount of money anyone can put into a pension in total.
How will the changes affect those who die after the age of 75? From April 2015, the 55% tax charge on lump sums has been replaced by a 45% tax charge, which is going to be consulted on with a view to moving this to the marginal rate of the beneficiary. If the fund is left to a beneficiary’s pension, then there is proposed to be no upfront tax charge and any income will be taxed at their marginal rate when taken through drawdown - therefore they will have to pass 20%, 40% or 45% to the taxman.
We will also need to see the legislation to confirm the changes and also to confirm whether they will be retrospectively applicable, as stated in the speech or only available to members who die after 5th April 2015.
Defined Benefit To Defined Contribution Transfers
Transfers from many Defined Benefit Schemes to Defined Contribution Schemes will be allowed, but only if you take regulated financial advice. This, however; does not include unfunded public service schemes.
Minimum Pension Age Going Up
The earliest date you can take retirement benefits is set to become linked to the state pension age. As the state pension age increases to 67 in 2028 the normal minimum pension age will also increase from 55 to 57. From then on it will remain 10 years below the state pension age. This will not apply to public service schemes for Firefighters, Police and the Armed Forces.
This won't impact those retiring early due to ill-health. But we await the detail on how this will affect those who have early protected pension ages such as professional sportsmen and women.
A consultation will be carried out on whether any transitional protection will be required for people who may suffer from the 55 to 57 change.
Tax Breaks On Contributions After 75
The over 75s may be able to continue making tax relievable pension contributions. Consultation is set to begin on removing the age 75 cap on pension funding.
Relaxation Of Dependants Scheme Pension Rules
Dependants' Scheme Pension rules are in line to get an overhaul. A consultation will look to ensure the rules apply fairly, and reduce administrative burdens.
You should seek advice at the time of drawing benefits. Charges may apply.
A Simple ISA Is NISA
In a major simplification for savers, the annual subscription limit has been increased to £15,000 (from £11,520), and there will no longer be a lower cap on the amount saved into a cash account. So you can save any combination of amounts up to £15,000 overall between your cash and stocks and shares ISA.
The simplified product is known as a NISA (New ISA), and all existing ISAs will become NISAs. Savers may also transfer their stocks and share ISA to cash.
The annual subscription limit for Junior ISA and Child Trust Fund (CTF) has also been increased from £3,840 to £4,000.
All of these changes took effect from 1 July 2014.
The value of investments and the income from them can go down as well as up and you may get back less than you originally invested. The Financial Conduct Authority does not regulate some forms of ISA.
National Savings & Investments (NS&I)
Two key measures were announced for savers with National Savings and Investments. Premium Bonds will have increased investment limits (£30,000 to £40,000 in June 2014, up again to £50,000 in 2015/16) and bigger prizes (two £1M prizes a month from August 2014).
The proposed fixed rates on the Pensioner Bond looks attractive - 2.8% gross/AER for a one year term, and 4.0% gross/AER for a three year bond. But there's a £10,000 maximum investment limit and the income will be taxable.
Starting Rate For Savings Tax Plummets To 0%
For those with no or low earned income and income from savings, the savings rate of income tax is falling from 10% to 0%, but also the savings rate band increases to £5,000 in 2015/16. The band is only available to set against savings income and is lost if non-savings income (for most people, their wages) exceeds the personal allowance plus the £5,000 band.
Working families will get £2,000 a year boost from the Government. From autumn 2015 families can get 20% tax relief on savings used for childcare up to a maximum of £10,000 for each child under 12 years old. An online scheme will be run by HMRC in partnership with NS & I.
To be eligible, families must have both parents in work (which includes self-employment), with each earning less than £150,000 a year, and they must not already receive support through tax credits or universal credit.
Families can't be in both employer supported childcare schemes and the new tax-free childcare scheme. Some families will be better off in one or the other, so guidance may be needed for some.
Tax Allowances & Thresholds
The personal allowance, set at £10,000 for 2014/15, will rise to £10,500 in 2015/16 for those born after 5 April 1948. At the same time, the level at which income tax becomes payable at higher rates will rise by 1% to £42,285, meaning that higher rate taxpayers with incomes below £100,000 will also be better off by £184.
Age related allowances will remain at £10,660.
From the 2015/16 tax year, a spouse or civil partner who doesn't have income to fully use up their personal allowance, will be able to transfer up to £1,050 to their partner, provided that partner is a basic rate taxpayer.
Capital Gains Tax
As previously announced, the annual exemption will rise by £100 to £11,000 in 2014/15 and to £11,100 in 2015/16.
The nil rate band will remain frozen at £325,000 until 2017/18.
Tricky Trust Simplification Postponed
The proposed IHT simplification on use of the nil rate band and rates of tax for trusts in the relevant property regime, expected to be in Finance Bill 2014, has been postponed until Finance Bill 2015.
The tax treatment of any investment depends on your individual circumstances. The Financial Conduct Authority does not regulate taxation advice.