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Pensions changes 2015 – What are the key points?

The Chancellor’s 2014 Budget introduced measures to help savers at every stage of their lives giving more choice and freedom. The reforms to pension saving, from April 2015 are not straight-forward and may prompt you to re-assess your financial needs. Book an appointment with us if you need guidance and advice.

The key points

The highlight of the Budget was the decision to allow individuals, once they reach age 55, to take their defined contribution pension as cash, rather than having to use the fund to generate an income, in the form of annuities or drawdown.  This allows greater access to pension savings, provided their pension scheme permits it. 

Savers do not have to use their defined contribution pension to provide an income.  Instead, they can take some, or all, of their pension as cash. If a saver takes cash from their pension, 25% of the withdrawal is tax free and the rest is liable to income tax at the individual’s marginal rate.

Savers are able to withdraw 25% tax free then draw a taxable income directly from the fund using ‘Flexi-Access Drawdown’.  ‘Flexi-Access Drawdown’ does not impose an annual limit on income withdrawal, so an income can be drawn with flexibility or a short-term annuity purchased.

Those who die under the age of 75, who have unused defined contribution or flexi-access drawdown pensions, can pass their unused pension to a person of their choice in the form of a dependants'/nominees' flexi-access drawdown arrangement free from tax. The dependant/nominee recipient can then draw a tax free income or lump sums from the fund.  For those who die after 75, the unused defined contribution or flexi-access drawdown pensions can also be passed to a beneficiary, free of inheritance tax, but any lump sums will be taxed at 45%.  Again, the recipient could draw an income instead, but would be liable to tax at their marginal rate.

What are the implications of the changes?

When you reach 55 you can now withdraw the whole amount from your defined contribution pension pot, albeit with what could be significant tax implications. From here, you can spend or use it how you like, giving you more control over retirement planning.

With interest rates remaining low and improved life expectancy being reflected in actuarial calculations, returns for retirement annuities have been fairly low. Also, once the terms and rates of an annuity have been agreed they can’t be changed. This has left many investors keen to explore other options.  ‘Flexi-Access Drawdown’ and cash withdrawals provide alternative ways of accessing your pension.

The reforms to pension ‘death benefits’ make defined contribution pensions a more tax efficient method of passing on wealth to younger generations. There are other ways to mitigate tax on death such as setting up a family trust.

There are various options to take benefits in retirement, making planning more complex.  Depending on your individual circumstances, some methods of pension access may be more suitable than others.  It is important that you use your wealth (including non pension assets) in the most tax-effective and sustainable way.

How we can help you

Our Private Banking and Advice Managers are available to help you understand the changes, review your strategy, and make any necessary adjustments. Book an appointment today to speak to us.

Important information

Past performance is not a guide to future performance. Investors may not receive back the full amount originally invested and the value of investments and the income from them may fall as well as rise. Tax treatment depends on individual circumstances and may be subject to change in the future.

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