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The pension reforms announced as part of the 2014 national budget have been hailed as the most significant changes to the retirement market in years.
These changes open up a number of exciting new opportunities in terms of how you can turn your personal pension savings into a viable retirement income.
In order to get the best value for your pension savings, it’s highly recommended that all people preparing for retirement speak to an independent financial advisor at the earliest opportunity.
The most important development in the 2014 pension laws is the announcement that from April 2015, practically all of the restrictions on access to your pension pot will be removed. The 55% penalty tax on withdrawing cash from your pension fund will be scrapped, and instead you’ll be taxed in line with your personal income rate (typically 20-40%).
From 27 March 2014, a number of changes were also brought into immediate effect, allowing more people to explore alternatives to buying an annuity:
For people who choose to go into income drawdown – leaving your pension fund invested and withdrawing an income from it directly rather than handing it over to an annuity provider – the amount you can take as income has been increased from 120% to 150% of the annual income you would have received if you’d bought an annuity instead.
To put this into context, a 65-year-old retiree with a pot of £100,000 might typically be offered around £5,000 per year from an annuity provider. Before the capped drawdown limit was raised, they could withdraw up to £6,000 per year. At 150% of the annuity rate, they could now withdraw up to £7500 per year, an increase of £1500.
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Flexible drawdown allows you to withdraw as much or as little as you like from your pension savings – but you must be able to demonstrate that you are already receiving a guaranteed annual income from elsewhere (Investments, property, state pension etc.) This minimum income requirement has been reduced from £20,000 to £12,000 per year.
Retirees with a smaller pension pot can sometimes take their savings as a cash sum straight away. This is often referred to as trivial commutation or triviality. The upper limit for taking trivial commutation has been increased from total pension savings of £18,000 to £30,000. As with other cash sum options, 25% of your pension pot can be taken tax-free, with the rest subject to your personal income tax rate.
The important thing to remember about trivial commutation is that the limits refer to the sum total of all of your pension savings. So if you have more than one pension pot, and the total amount you’ve accrued is more than £30,000, you will not be eligible for trivial commutation.
Another option for retirees with small or multiple pension pots. If you have a single small pension pot, you can now cash it in as a cash lump sum even if you have larger pension savings elsewhere.
The upper limit for cashing in a small lump sum has now been raised from £2,000 to £10,000. You can also convert up to three individual small pension pots into small lump sums, an increase from the previous limit of two.
For example, if you had three personal pension pots worth £10,000 £5,000 and £3,000, you could now convert them all into a single lump sum totalling £18,000. 25% of this (£4500) would be tax free, while the rest would be subject to your personal income tax rate.
Alternatively, if you had one pension pot worth £8,000 and another worth £40,000, you could take the £8,000 pot as a cash lump sum, while using the £40,000 to buy an annuity, putting it into drawdown, or simply leaving it untouched.
One of the major changes announced in September 2014 was abolition of what is commonly known as the ‘death tax’: the 55% duty currently paid on pensions that are passed on when you die. You are now able to pass on your pension to anybody – spouse, children, grandchildren – with them only paying the marginal tax rate if you die at the age of 75 or over. Or, in the event that you die before the age of 75 it will be passed on tax-free. This applies to all payments made from April 2015.
Read more on this on the My Pension Choices Blog
In the course of outlining the 2014 pension reforms, the government also laid out recommendations that all people approaching retirement seek impartial, independent financial advice. At My Pension Choices we run a free service in association with the Financial Advisor Network, connecting users to carefully selected, fully accredited IFAs who can offer personally tailored, plain-English guidance on a wide range of retirement income options.
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If you have any questions or concerns, call us on 0800 008 6065 to speak to a member of our team.