In the 2014 budget, George Osborne significantly increased flexibility over pensions.
What this means for you is that more choices will be open to you when the time comes to start drawing on the funds you’ve set aside to provide income in your retirement. The changes announced in the Budget mean that you will have much more choice on how you take the benefits.
Up until these changes, you would have had the right to take only 25% of the total value of your pension pot as tax-free cash and with the remainder you would have been forced to buy an annuity. After the changes come into effect, while there will still be a ceiling of 25% on the amount of lump sum you can take on a tax-free basis, you will have the following three options open to you:
1. You will be able to withdraw the entire value of your fund as cash, 25% of which will come to you tax-free, the remainder will be taxed at your marginal income tax rate.
2. You will be able to purchase a drawdown product that will let you draw down as little or as much as you want or need each year.
3. You can choose to purchase an annuity that suits your needs and personal circumstances.
These changes will bring the possibilities open to UK pension holders more in line with other schemes throughout the world, most notably in Australia and the USA.
While these changes are not expected to come into play before April 2015, there are some changes that came into effect immediately after the budget.
a. An increase in the “trivial commutation” or small pot of cash that can be taken, from £18,000 to £30,000.
b. An increase in the small pots of cash that can be taken individually from 2 to 3 times and from £2,000 to £10,000.
c. A rise in capped drawdown limits from 120% to 150%. This will come into effect when schemes move into their next scheme year after the budget.
d. The possibility of flexible drawdown with an income of only £12,000, rather than the current £20,000.
There are various other more detailed changes afoot, all of which open up tax planning opportunities, but these are the most significant right now.
So what does all this mean for you?
It means that your ability to tailor your pension benefits to your actual needs, rather than being forced down a pre-defined route becomes possible. However, the downside of this is that the pensions decision-making process is now even more complex than it was before. As a result, it is now more important than ever to get yourself close to a source of trusted, good quality advice and guidance as you near retirement.
If you’d like help to make the right pensions decisions moving forward, why not get in touch? Our experts will help you make the right decision, based on your unique circumstances, making sure you get the best deal all round.