Yesterday George Osborne gave us a greater insight into his plans for pension reforms previously announced in the budget, offering greater flexibility to those of us who are approaching 55 or older, who haven’t yet accessed our pension pot.
On the face of it these plans aimed at giving us more flexibility and control all sound very promising and exciting but what exactly will these changes mean to you and I and more importantly, just how will they impact and benefit our families?
What happens now?
In order to look at the changes, it makes sense to first look at what happens today.
Currently the earliest date you can access your pension pot is when you are 55 years of age, although in reality for most it is 65 plus or when we actually retire.
You are able to withdraw up to 25% of your pension pot as a tax free cash sum, using the remaining 75% to purchase an annuity.
Annuities in their current format are the main reason the government is making these changes to pension legislation, as they have been viewed as poor value for money with product providers slow to produce innovative new products that provide a decent return to customers.
So what’s new?
Slowly but surely, more details are being released about how the pension reforms will affect us although talks are still taking place so further changes are bound to be announced over the course of the next few months.
To help you keep abreast of the situation as is stands to date, here is a summary of key changes:
> From the age of 55, you will have total freedom to use your pension pot how you choose
> You will still be able to take the first 25% of your pension pot as a tax free cash sum but will also have the ability to access the rest of your funds.
> If you do decide to access these additional funds (i.e. over the 25%) you will pay tax at your highest marginal rate. For example, if you are a 20% tax payer, you will pay 20% tax on the amount you withdraw over 25%. If however you fall into the higher tax bracket once you have added you released pension fund to any other income you have, you could find yourself paying 40% on some or all of the monies withdrawn.
> To help you decide on the best plan of action, you will have free access to impartial advice either face to face, over the telephone or online, provided by the Pensions Advisory Service or the Money Advice Service. This is relatively new information so expect to hear more details on sources of advice as implementation plans develop
> The age at which you can draw your pension will increase from 55 to 57 from 2028 in line with the rise in the state pension age.
Basically the age at which you can access your funds will remain 10 years below the statutory state pension age, which as you are aware is currently 65.
> Those with defined benefits schemes e.g. final salary schemes will also be able to make withdrawals but to do so must transfer their pension pot into a defined contribution scheme e.g. A SIPP. This is not for the faint hearted though and should come with a health warning as doing so could result in a loss of valuable benefits therefore financial advice is a must.
> Finally, from April 2015 people who start to take an income from their pension will also be able to continue making contributions, up to a maximum of £10,000 a year.
In addition, expectations are that the new breed of annuities launched by product providers will include the ability to extend the time your spouse or next of kin can receive a reduced pension, although this will of course come at a price and will undoubtedly reduce your income but let’s see what they come up with.
So good news all round?
I guess that depends on your outlook in life and ability to manage money. Some financial pundits have warned that a minority of people will behave more recklessly than others and blow the lot in the early years, expecting the state to pick up the pieces in later life. George Osborne’s view however is that by far the vast majority of us will behave responsibly as we have at the end of the day worked all of our lives for it.
Thanks for the vote of confidence George.
What else could they have done?
Whilst overall these changes are very welcome, I would have liked to see the government go a little further by offering tax relief on long term care costs and prepaid funeral plans.
We are an ageing population so our need for long term care will only grow and grow; therefore surely the government has to do more to avert this ticking time bomb which could after all potentially be a massive burden on the state coffers?
In addition to this need to prepare for later life, we also need to think about funeral planning given the very real financial crisis many families face when it comes to paying for a relative’s funeral.
It’s great that prepaid funeral plans are starting to become acknowledged as an efficient way to pay for your funeral in advance but the issue here is lack of awareness.
By offering tax relief of prepaid funeral plans that are paid for directly from your pension pot, the government can help families avoid financial hardship and raise the profile of a sound solution to this growing problem.
So what’s your view?
Are you happy with these pension reform changes or would you like the government to go further? Let us know today.