Good news if you thinking of retiring
Enjoying Your Retirement
The Treasury has announced further concessions for individuals saving for retirement; giving them more freedom over when and how they take lump sums from their pension pot.
Under the current rules, anyone who is aged 55 or older can take 25% of their accumulated pension savings as a tax-free lump sum, but the remaining 75% has to be used to buy a retirement income or annuity. The changes coming in to force on 6th April 2015 will mean that in future savers will be able to dip into their pension pot when they want, and each time 25% of what they take out will be tax-free; or if they want, they can take out the lot.
This means that if you’re aged 55 or over, you can take as when drawdowns as you want and when you want them; whether it be to pay off your mortgage, help your kids or simply to have that holiday of a lifetime.
The new changes announced by the Treasury yesterday and the earlier changes announced by the Chancellor in his budget, will be in a Taxation of Pensions Bill, set to go to Parliament for debate and hopefully ratification, next week.
Ahead of the publication of the Bill, George Osborne said: “People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan. From next year they’ll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax free. For some people an annuity will be the right choice whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown. We’ve extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum”.
Pensions expert Dr Ros Altmann said, “The government’s changes have the potential to help millions of pension savers make better use of their pension funds. Being free to access their money freely as they need to, rather than being forced to buy particular products, will be very popular”.
Who will benefit?
Anyone who has a defined contribution pension; essentially this means where your contributions build up in a pot, which is then used to buy a retirement income. This includes most auto-enrolment schemes. In the UK roughly 12 million people currently save into such pensions and, according to the Association of British Insurers (ABI), 400,000 people already use them to provide an income, known as a “pension drawdown”.
How will the changes affect those who die before the age of 75?
Currently, anyone who inherits a pension fund which is already being used to provide an income has to pay 55% in tax. The only exceptions are spouses or children under 23, who to pay Income Tax on any income drawn from the fund at either 20% or 40%. If a pension fund has not been used to provide an income, there is no tax payable.
From April 2015, anyone who inherits a pension fund will have no tax to pay, whether it is already being used or not. They will not be liable for income tax either. But there will still be a limit of £1.25m on the amount of money anyone can put into a pension in total.
How will the changes affect those who die after the age of 75?
Currently anyone who inherits an unused pension pot from someone older than 75 has to pay tax at 55%. Spouses however can inherit the pension (but no other beneficiaries), and pay income tax on the income they receive.
But from April 2015, all beneficiaries will only have to pay Income Tax. Depending on the rate of tax they pay, their marginal rate, they will have to pass 20% or 40% to the taxman.
What will happen to annuities?
An annuity is where you hand over your pension pot to an insurance company to buy an income for life. These will still exist for those individuals who want to guarantee a particular level of income. But once an annuity is purchased, it cannot be passed on to someone else, other than your spouse, without considerable expense.
As a result, the new tax rules are likely to make annuities look even less attractive, in comparison to keeping savings in a pension fund.
Can I use a pension to avoid inheritance tax?
Up to the age of 75, passing on a pension will carry no tax liability; whereas other assets, like money in shares or savings accounts will be liable for Inheritance Tax (IHT). Currently passing on anything worth more than £325,000 to your beneficiaries is taxed at 40%.
Even beyond the age of 75, most inheritors would only pay 20% income tax on the money they receive from a pension fund, which is far less than under IHT. So it might make sense for pensioners to put as much as they can into a pension fund, although there is a lifetime limit of £1.25m.
A Tax Accountant’s View
Personally, I think that the new pension rules are great news for everyone, especially the millions of people coming up to retirement. They offer the key benefit of flexibility, with you choosing when to take out your pension savings and not being hit with punitive rates of tax.
I also disagree with many so-called experts, who have gloomily predicted a wholesale stampede to draw out the whole of the pot and blow it on wine, women and song (assuming your still up to it of course!). In my opinion this will actually encourage people to save more in their pension pots, knowing that their children and grandchildren will now benefit from their inheritance without paying a fortune in tax.
If any of you would like more detailed information on any aspect of the Pension Drawdowns, send me an e:mail and I’ll be pleased to advise further.
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.