New pension rules confirmed

“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want” - George Osborne

Following the proposed changes to pensions announced in the March budget, further details have now been announced. A summary of the changes are below.

From April next year, pension investors aged at least 55 will have flexible access to their pension and will have the freedom over how they take income, with a lump sum option being available. This will give pension investors more flexibility in how they wish to spend, invest or save.


Tax implications

Whilst 25% of your pension pot will remain tax free, the remainder will be subject to income tax. This means that if you are a basic rate (20%) taxpayer, any income taken from your pension will be added to any income that you already receive. This could push you to the higher (40%) or even top-rate (45%) income tax bracket.

You can manage your tax liability by taking your pension out in stages, rather than one go. It will also be possible to take the tax-free cash straight away and the taxable remainder at a later date.


Drawdown risk

Income drawdown allows flexibility when taking an income or when passing onto heirs. Although, like most investments, with this increased flexibility comes increased risk. Unlike an annuity (secure income where the insurance company takes on the risk) the risk lies with you. Poor investment or taking excessive income will reduce your pension pot and in the worst case scenario it could run out.


Further contributions

If you take an income from your pension after April 2015, you may still be able to make contributions. This will be capped at £10,000 a year, including employer contributions, and pension benefits being built up in final salary schemes. There are however, some exceptions.

This is being introduced to stop people having the salary paid directly to their pension, and therefore receiving 25% tax free and also avoid national insurance contributions on employment income.

Currently, investors are not able to make contributions if in flexible drawdown. Investors who are in flexible drawdown before April 2015 will be able to make contributions going forward.


Free guidance

Taking your pension can be an extremely confusing moment in a person's life. George Osborne has therefore announced that everyone should have free guidance to help make sense of all the options now available at retirement.

This service will be provided free of charge by consumer-facing, impartial organisations such as the Money Advice Service (MAS) and The Pension Advisory Service (TPAS). Investors will be able to get the advice through consultations over the telephone, face-to-face or on the internet.


Defined benefits

In an addition to the measures announced in March, there has been another change, meaning that anyone with a defined benefit (final salary) pension will be able to take advantage of the new rules, along with the unlimited withdrawals. To do so, you will simply need to transfer to a defined contribution scheme (e.g. SIPP). As valuable benefits could be lost, independent financial advice will need to take place.

Investors who are members of “funded” defined benefit schemes, like local government pension schemes, will be able to transfer to defined contribution schemes, so that they can make use of the more flexible rules. However, members of unfunded public sector schemes, like the Armed forces will not be able to transfer. The latter has been put into place as unfunded schemes are met by general taxation, and approving transfers could have an immense impact on the Exchequer, whereas funded schemes have the facility to help pay for transfers.

Pensions can be complicated products and if you are unsure about any investment decisions you should seek independent advice.


Inheritance tax

Finally, the Chancellor has noted that the tax paid on pensions in drawdown, should this be passed to heirs upon death is too high. At the moment, if you are in drawdown, or you are 75 or older, a lump sum paid to beneficiaries is taxed at 55%. This has not been resolved, but the Chancellor believes that this should change, and there will be a further review this year.

If, however you die before you go into drawdown, or buying an annuity, and before the age of 75, your entire, untaxed pension pot is paid to beneficiaries. This will, however, be subject to inheritance tax.