The pensions’ revolution was sprung upon us in March, when George Osborne, the Chancellor, disclosed plans in the budget to liberalise pensions.
Here is what we already knew
Savers aged over 55 from April 2015 will be able to access their pensions with complete freedom. Instead of being forced, under government rules, to convert savings into an annual income, they will be able to take out as much as they like, as often as required.
Historically, savers with non-final salary pensions – i.e. with pots of money invested in the stock market – have bought annuities. This turned a pension into a regular income that lasted a lifetime. A small number of wealthier savers were able to avoid annuities and use “income drawdown”, where the money remained invested and an income was taken. However, a cap on withdrawals applied for all but the very wealthiest who had £20,000 annual incomes from other pensions.
From April 2015, savers have three main choices: withdraw all their pension money immediately; leave it invested and take income when required; or buy an annuity. Withdrawals will be liable for income tax. People who have already bought annuities are excluded from the freedoms.
What we found out this week:
Since the Budget, the government has been in consultation on how the new pension system should work. Its conclusions, published on Monday September 29, contained several key clarifications.
1 Final salary pension schemes
Ministers had contemplated a ban on savers transferring final salary pensions to other schemes that would pay out the entirety as cash lump sums. The Treasury feared a rush of transfers would have a detrimental impact on some schemes – and that might put at risk the businesses and members who stayed behind.
The government confirmed transfers out of private sector final salary schemes will still be permitted after 2015. Anyone transferring more than £30,000 will need to take independent financial advice. There will be a consultation on allowing savers to withdraw money directly, removing the need for a transfer. The vast majority of public sector workers will be blocked from transferring their generous pensions.
2 Tax on death
Currently, money inside a pension that has been accessed can be passed on to beneficiaries, less tax of 55pc, when a pensioner dies. This applies to the drawdown policies held by around 400,000 people. With millions expected to use drawdown in future, this tax rate is deemed too high. If it remained, it would encourage people to pull money out of pensions, even if this option was inappropriate. So the government will in the autumn announce a reduction.
3 Rising personal pension age
An increase in the age at which savers can access their personal pensions had been mooted in the budget. This will rise from 55 to 57 in 2028 and then stay 10 years below the official state pension age, it was confirmed on Monday.
Anyone born after March 5, 1971 will be unable to access pension money until age 57. Those aged under 40 are likely to have to wait until age 58. Younger workers may not be eligible for a state pension until age 70, and so will have to wait until 60 to access private pensions.
To find out just how these reforms affect any of your UK-based pension funds, contact an IFA at Blacktower.
By Robert Mancera
Robert Mancera is Director of Blacktower Financial Management (International) Limited. 289 355 685
Blacktower Financial Management (International) Limited is licensed by the Financial Services Commission in Gibraltar. Blacktower Financial Management Limited is authorised and regulated by the Financial Conduct Authority in the UK.