Pension changes in 2015
Pension regulations will be relaxed come April. Here, Paul Harris from The Oxford Advisory Partnership takes a look at these changes:
Which investment gives you tax benefits when you put the money in, as well as when you take it out and now also, in many cases, when you die? The answer could well be ‘a personal pension’….but the devil, as always, is in the detail: One of Mr Osborne’s Budget headline grabbers was: “It’s your pension, so it’s your money and if you want to withdraw it all in one go then that’s fine. You don’t have to buy an annuity, unless you want to”. Maybe so, but many older style pensions are unable to accommodate these rule changes, so you must check to see if your plan will allow you to benefit from these new ‘flexible access pension’ rules. If not, and you wish to benefit from these new freedoms, you will need to move the money to another plan which will permit this*. However, even if you can do this, it doesn’t necessarily mean you should.
For some people, an annuity might well still be the best option, especially if they need a guaranteed level of income for the rest of their lives; so all options should be carefully considered. Assuming the new regime is of interest to you, and you have £100,000 in your pension pot and have not exceeded the Lifetime Allowance, you can withdraw 25% tax-free, so £25,000. This leaves you with 75% to take, i.e. £75,000. But this is not tax-free. It’s added to the rest of your income and will be taxed at your marginal rate, so if you take it all in one go you could end up paying rather a lot of tax.
The new rules also allow someone to ‘phase’ the withdrawal of capital from a pension over a number of years, thereby smoothing the tax effect and so this should also be considered. This is just one of many amendments recently announced to the pension rules, with more clarification still to come.
One of the other big good news stories is that after 5 April 2015, the ‘Death Tax’ for inherited annuities or lump sum death benefits is going to be abolished. If death occurs before age 75, all inherited benefits, be that income or lump sum, can be paid tax-free. If death occurs after age 75, they won’t be tax-free, but whereas previously they were taxed on receipt (and at 55%) they will now be taxed on withdrawal at the recipient’s marginal rate, which could be 0% / 20% / 40% or 45%, but in all cases, much less than 55%!
There is inevitably some ‘less than good news’ too, the key issues being:
- State pension age is planned to increase to 67 in 2028 and the minimum retirement age (at which you can access pension benefits) will be 10 years less than that, so 57 (it is currently 55).
- Lifetime Allowance reduced to £1.25 million but Individual Protection also introduced, allowing members with benefits valued between £1.25 million and £1.5 million (as at 5 April 2014) to protect them.
- If you flexi-access your pension, your money purchase annual allowance is reduced from £40,000 to £10,000.
- Overall, this is possibly not a bad trade-off: lots of new freedom and flexibility but we have to wait longer for our state pensions and people with larger personal pension pots and/or the ability to make larger contributions have had their allowances reduced…again. For further information about the changes to pension rules, go online to finders.co.uk/news.
And finally: Not pensions, but usually geared towards retirement planning: ISAs. In his Autumn Statement, Mr Osborne said: “From today…..when someone dies, their husband or wife will be able to inherit their ISA and keep its tax-free status”. What he meant was that they would inherit the allowance, but not the ISA. For example: From next April, the ISA allowance is £15,240, so if someone died on 6 April 2015 before making their ISA payments, their spouse’s ISA allowance would be £30,480….but they wouldn’t inherit the ISA. They would, however, be allowed to invest additional funds in their own ISA up to the value of the deceased partner’s ISA when they died, this being a major improvement on the current rules.