With his 2015 Budget, Chancellor George Osborne set out to woo voters at both ends of the generational spectrum. While help to buy ISAs are designed to entice young first-time buyers, the new pensions freedom, championed as a radical change by the incumbent Government, will be of great interest to those approaching retirement.
What, exactly, is meant by pensions freedom? For the first time, those over 55 will have full control over how they access their hard-earned savings. If you have a defined contribution (DC) pension, you can now withdraw your money in full as a lump sum or in instalments. The purchase of an annuity is no longer mandatory, opening up a number of possible avenues for those approaching retirement age.
The new flexibility
Should you choose to take your entire pension in one go, 25% will be available tax-free, with the rest taxed as regular income. The extraction of funds need not be a one-time option, either. Savers can dip into their pots as many times as they like, with a quarter of each withdrawal once again going untaxed. You can even take out your 25% tax-free cash, then draw a taxable income (via drawdown or an annuity) from the remainder.
What of those who have already reached that golden age? The new flexibility will cover them, too – but not just yet. From April 2016, pensioners can sell their previously purchased annuities, trading in their regular payments for a cash sum – without facing the hefty tax penalty of previous years. Just like newly initiated, those already in possession of a pension plan can access their funds in different ways, should they wish to do so.
Death to the ‘death taxes’
Be they new or mature, all with defined contribution pensions stand to benefit from the abolition of the pension ‘death taxes’. Previously, HMRC would take over half of any inherited pension – 55%, to be precise – when its holder passes away. Now, should he or she die before the age of 75, the children can receive their inheritance completely tax-free. Should the parent live beyond that age, their pot could be subject to 45% taxation if taken as a lump sum – though this may change from 2016 onwards – or, if taken as a regular income by the beneficiaries, will be taxed at their income rate.
Lifetime savings allowance
It’s not all positive news where flexibility is concerned, however. The lifetime pension saving allowance has been cut once more, down from £1.25m in 2014 to £1m in 2015. The annual allowance of £40,000 a year remains unchanged, whilst a new £10,000 allowance has been provisioned for those accessing their pots in a flexible manner. Regardless, that overall cap will likely affect earners at the higher end of the income spectrum.
Keeping in the loop
The Government has established a free Pensions Wise service to provide information on the changes and the available options. This can be accessed face-to-face in Citizens Advice branches or over the phone with The Pensions Advisory Service, or TPAS. However, this does not constitute financial advice, instead giving a broad and general overview of the new legislation.
For tailored personal advice regarding your pension and your options, come and talk to us today.