What we think the new pension income regime is!
After the flurry of announcements from the government in February and March 2014, we are now starting to see the change in pension income products starting to come through. As some of the actual legislation will not be in place until April 2015, there is still some scope for a surprise change in the rules, but I would suggest that the pension choices will be very close to the following summary. (All of this assumes defined contribution or money purchase funds. The rules for defined benefit/final salary schemes are different again).
Pension fund total of less than £30,000, in between 1 and three schemes; from the 27th March 2014 you can withdraw all of your pension funds as cash within a year of each other. The first 25% will be wholly tax free, but the balance will be taxed at your personal income tax rate, somewhere between 0% and 45%, depending on your taxable income in the year.
If you do not want to have cash from your pension you can still purchase an annuity, but given the way the benefits system works, you are likely to lose out overall.
Pension funds of between £30,000 and £1.5Million; from the 27th March 2014 you can take up to three individual pension funds of £10,000 or less under the “small pots” rules. As above, the first 25% will be tax free, with the balance treated as taxable income in the year it is received. Other funds held, not available under the small pots rules can be used to purchase an annuity, capped drawdown or flexible drawdown, (with a threshold of guaranteed pensions reduced from £20,000 to only £12,000), almost as before. One change in the drawdown regime is an increase from 120% to 150% of GAD, so existing drawdown plans could release more income, without waiting for a triennial review.
From April 2015, almost any pension fund can be taken as cash, with 25% tax free and the balance taxed as income in the year it is received.
Pension funds of more than £1.5Million; you need professional advice as even with enhanced protection, you might be penalised for breaching the lifetime allowance.
- Think carefully before you just extract all of your pensions as cash; if you are really unlucky you might end up paying 45% tax, when spreading the income over more than one tax year might reduce the tax bill to nothing.
- Think about how much capital would be useful to actually meet a need, like paying down your mortgage. Using a mixture of tax free cash and the “small pot” rules, you may be able to increase the total capital you can extract.
- Although annuities are unfashionable at the moment, they are cheap to buy, represent low risk, high security and prevent you from running out of income if you live longer than expected.
- Drawdown schemes are currently expensive to establish and run. The FCA has previously stated that they consider it unlikely that such products would represent best advice for pension funds below £100,000. On the 13th November, FCA Head of Investment, David Geale suggested £50,000 was the current poor value threshold at the Pension Bill Committee hearing. Unless cheaper schemes are developed quickly, the FCA is unlikely to change its position further.
- As of today, (13th November 2014), no provider expects to have a “Flexi-Drawdown” Scheme in place for April 2015. Advisers and retirees will need to keep an ear to the ground, as a new product may change the environment for the better.
- The big unknowns that used to exist still exist! How long are you going to live? How long will your money last? What will inflation be over the years until your demise? Some form of “long stop” still seems sensible, which suggests that some annuity income is wise.
- As there are more choices and more variables to take into account, professional advice becomes more important.
Talk to us before you do anything drastic! You will get the most value out of a formal meeting if you consider in advance how much you want to spend each year as a retiree. We will fill in the assumptions that have to be made and give you a realistic plan, explaining the variables. Life is a series of risks strung together; we can quantify the risks and stop you falling into anything silly!
Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.
If you know you need formal advice, have a look at http://bankfield.net/personal/retirement-planning/ or ask around for a recommendation, it might even be me.