The Savers' Revolution

9 October 2014 - The changes announced in the March budget were good news for investors, and the Savers Revolution looks set to continue. In the March budget, chancellor Osborne announced major reforms for defined contribution pensions. Under the reforms, pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. There are no caps or drawdown limits.

Also important, is that from April 2015 investors will no longer be forced into buying an annuity, which at today’s low interest rates, typically offered a poor level of income. And just this week, Osborne has gone further, and made pensions even more attractive by scrapping the 55% death duty tax currently levied on pension pots after their holders die. This leaves even less reason to buy an annuity.

In light of these reforms, we look at the impact on self-invested personal pensions (SIPPs)

Currently anyone who inherits a SIPP from someone over the age of 75 or from someone who is currently drawing an income, has to pay 55% tax. The exceptions being spouses and children under 23. The new law will mean anyone who inherits a SIPP from someone who is under the age of 75 is liable to no tax. If the SIPP is inherited from someone over the age of 75 the SIPP can now be drawn down at the inheritors marginal rate of tax, either 0%, 20%, 40% or 45%.

You can now also leave your SIPP to anyone, not just your spouse or a dependant, making them much more flexible. The new flexible drawdown option announced in the Budget (due to come into effect next April) gives investors much more freedom and control over their SIPP when they come to try and take money out.

We will also add one important caveat. As we have recently seen, the government can change the rules at any time. We might have a new government next year and a new set of laws. Investors should prepare themselves for any scenario as best they can. However, these revolutionary changes have made investing in a SIPP look much more attractive than before. Long-term investors may want to consider investing more into their SIPP. Chelsea has recently launched the Cofunds SIPP via the Chelsea FundStore, a low cost execution-only product designed to make investing in a pension as simple as possible. Any decision you make should be carefully considered.