I’m pleased to say that at long last the pension changes for April 2015 have been confirmed in the Pension Bill, clarifying the much publicised radical proposals made in this year’s budget.
Great news for those of you who will be 55 or older when the changes are implemented and have a personal pension, an AVC (Additional Voluntary Contribution), stakeholder pension or a SIPP (basically any form of defined contribution scheme).
Championing the new pension freedom, the Government believes we should be able to take as much or as little of our pension pot as we want and have the ability to pass on our hard earned pensions to our families, ‘tax free’, with Chancellor George Osborne stating, “People should be free to choose what they do with their money”.
So what are the key pension changes?
• You no longer need to buy an annuity with your pension pot
• You will have access to 100% of your cash to do whatever you wish
• You can withdrawal up to a quarter (25%) as a tax free cash sum
• Or you can take multiple payments over time with the first 25% of each withdrawal tax free
From April 2015, someone with a pension fund worth £100,000 will have the following choices:
1. Take the £25,000 tax-free cash all at once; any subsequent withdrawals will be taxed as income
2. Make a series of withdrawals over time, receiving the first 25% of each withdrawal tax free. For instance, for lump sum withdrawals of £20,000, £5,000 of each payment will be tax free. Equally, someone taking an income of £1,000 a month would receive £250 of that payment tax free. Please note: this will not be available through an annuity.
The second option could be attractive because it may help you manage your tax liability, avoiding nasty surprises at a later date.
Your personal pension piggy bank
Given this level of flexibility, the Chancellor wants us to view our pension pots as another form of bank account; available to make withdrawals whenever we wish either by taking cash, investing funds in an annuity or taking a regular income – our own personal pension piggy bank!
A word of warning
Before all you 55 plusers start jumping for joy, it is important to make two points.
Firstly pension providers have not worked out the processes and charges for making multiple withdrawals yet, although having said that the Prime Minister has stated that he will ensure any fees are ‘reasonable’ – we wait with baited breath.
Secondly, this move to pension freedom could come at a cost, both to the individual and the country if people decide to blow the lot and subsequently have to rely on the state for support; although the government does not share this sentiment.
It is worth keeping in mind that even those well meaning souls making their own investments in a bid to secure their future may end up losing more than they had forecast as let’s face it, even the expert fund managers have bad days.
So what about annuities?
Whilst you no longer have to purchase an annuity, for some this could still be the best option; it all depends on your circumstances. We do expect insurance companies who provide annuities to introduce new schemes and reassurances that may look more attractive, so seeking professional advice is essential.
What happens to those on a final salary pension?
If you have a defined benefit pension scheme known as a final salary scheme, it will be possible to take advantage of the new pension changes, however in doing so you could lose valuable benefits, so seek independent financial advice first.
What if you have already retired?
Unfortunately this is where the bad news comes in. Sadly those who have already taken out an annuity will not be affected by the changes; a point I am sure will be frustrating for many.
Additional pension changes
Another welcome change is the abolition of the so called pension death tax. Up until now, there has been little incentive to preserve your pension pot as when you died, it could be subject to a whopping 55% pension death tax.
Under the new rules this death tax will be abolished, so when you die, any pension money left will go to your beneficiaries; another good reason for making a Will if you don’t already have one.
One more thing
It’s worth noting that whilst the pension age today is 55, this is set to rise to 57 by 2028 as the state pension age rises to 67.
Help is on hand
Under the new pension changes for 2015, the Chancellor announced that everyone will be given the opportunity to have a free guidance consultation on their options. This will be with impartial organisations such as the Money Advice Service and the Pension Advisory Service, either in person, over the telephone or online.
The most recent announcement is that the Citizen’s Advice Bureau will be offering face to face guidance, let’s hope that they can cope with demand!
Your pension set free
These radical pension changes will give everyone retiring from next April complete financial freedom; something I as a 52 year old welcome and look forward to the choices it will offer me in 3 years time.
At the end of the day it’s our money; something we’ve worked long and hard for over the years, so the fact that we will no longer be forced into purchasing products that don’t offer the flexibility required to cope with our very different and complex lives has to be a good thing.
We along with our pension pots have finally been set free.