FSC Investment Services: The lowdown on pension changes

By Frank Cochran, FSC Investment Services 

FOLLOWING the Chancellor’s Budget last year, a consultation took place into proposed changes that would give savers more flexibility with their pensions.

The Government’s response to this consultation has now been published and investors should start planning with their advisers to make the most of the changes that will now become official.

The key elements of the plans begin with the normal pension age increasing to 57 from 2028, and the state pension age rising to 67 at the same time, which will affect those born after March 1973.

The news that we have been watching out for – increased flexibility from defined contribution pensions (often called personal pensions) – will go ahead from April this year.

This means savers will be able to withdraw funds from their pension at any time from age 55. Importantly, if an existing scheme does not include such flexibility, savers will be able to transfer their funds to a scheme that does.

Members of employer funded, defined benefit schemes will not be left out – as long as they have taken advice from an independent, Financial Conduct Authority (FCA)-regulated professional first, they will be able to transfer to an alternative defined contribution scheme to access the new income flexibility. It’s important to note that this move may not be right for everyone.

Death benefit tax, which is the charge levied on the value of the pension fund that remains after death, will be cut from its existing 55% rate to zero. The logic behind this is that it will encourage savers to opt for more sustainable incomes rather than simply trying to avoid a tax charge.

One area that will not change is the right to take 25% of the pension pot as a tax-free sum.

Once the flexibility option has been triggered and a saver begins to take income using flexible drawdown, a £10,000 annual contribution allowance will apply meaning they cannot add more than this amount to their pensions. However, this allowance will not be triggered by, for instance, taking a secure income or tax-free cash. This change is designed to prevent abuse of the flexibility.

Clearly a lot is changing, much of it likely to be very confusing and so it is vital that professional advice is obtained in order to make the most of this new flexibility and the changes in general.

Those savers currently without good financial advice will have access to free and impartial guidance from independent providers including the Citizens Advice Bureau. However, it is important to note that this guidance will not be regulated by the FCA and is not intended to replace professional advice.

As always there is a lot to think about, and savers should consult their financial advisers sooner rather than later to check what they should be doing to maximise the opportunities these changes will bring.

The Chancellor announced that from April 2015 individuals would have the freedom to pass on their unused defined contribution pension to any nominated beneficiary when they die, rather than paying the 55% tax charge, which currently applies, to pensions passed on at death.

Around 320,000 people retire each year with defined contribution pension savings; these people will no longer have to worry about their pension savings being taxed at 55% on death.

From this April, individuals with a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to pass their pension to if they die.

If the individual dies before they reach the age of 75, they will be able to give their remaining defined contribution pension to anyone as a lump sum completely tax free, if it is in a drawdown account or uncrystallised.

The person receiving the pension will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown.

Anyone who dies with a drawdown arrangement or with uncrystallised pension funds at or over the age of 75 will also be able to nominate a beneficiary to pass their pension to.

The nominated beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax.

There are no restrictions on how much of the pension fund the beneficiary can withdraw at any one time. There will also be an option to receive the pension as a lump sum payment, subject to a tax charge of 45%.

This system replaces the current 55% tax charge which the government committed to reviewing as part of the Freedom and Choice in Pensions consultation and has the potential to benefit all those with some form of defined contribution pension savings – that is 12 million people in the UK.

 

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