Summary of the Chancellor’s Pension ReformsApril 16, 2014 // No Comments
The UK200Group summarise the facts on the Chancellor’s ‘Pension Reforms’ announced in the Budget of the 19 March 2014
Osborne pulls pensions ‘rabbit’ from Budget hat
Chancellors of the Exchequer are famous for pulling rabbits out of hats when they deliver their annual Budget, and George Osborne proved true to form on 19 March, with a major shake-up for pensions.
In what was described in the official Budget 2014 document as “the most fundamental reform to the way people access their pensions in almost a century”, Mr Osborne announced that from April 2015, savers would be able to access defined contribution pension savings as they wish from the point of retirement, with no obligation to buy an annuity.
Mr Osborne said: “People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances.
“And that’s precisely what we will do now…Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want.”
Tax rules will also be changed to reflect the new flexibility. Under the current tax system, people are charged 55 per cent if they choose to withdraw all their defined contribution pension savings at the point of retirement, which makes an annuity that provides an income over the course of retirement the usual choice.
Mr Osborne said: “It will still be possible to take a quarter of your pension pot tax-free on retirement, as today.
“But instead of the punitive 55 per cent tax that exists now if you try to take the rest, anything else you take out of your pension will simply be taxed at normal marginal rates, as with any other income – so not a 55 per cent tax but a 20 per cent tax for most pensioners.”
The new arrangements mean that from April next year, new retirees will have the following options:
• they can buy an annuity
• they can take out all their pension savings in a lump sum
• they can keep their pension pot invested and access it over time.
More immediately, from 27 March 2014, new rules will be introduced, which the government says will give people “greater freedom and choice now over how to access their defined contribution pension”. They mean that:
• the amount someone can take of their total pension savings as a lump sum will rise from £18,000 to £30,000
• the size of a small pension pot that can be taken as a lump sum, regardless of total pension wealth, will increase from £2,000 to £10,000
• the number of personal pension pots that can be taken as a lump, under the small pot rules, will rise from two to three
• under capped drawdown, the maximum amount that can be withdrawn from a pension each year has been capped at 120 per cent of an equivalent annuity. This figure will rise to 150 per cent
• with flexible drawdown, there’s no limit on the amount that can be withdrawn from a pension pot each year, but the saver must have a guaranteed annual income in retirement of £20,000. This will be reduced to £12,000 per year.
Given all the changes, it is perhaps reassuring that another Budget announcement recognises that pension savers will need to comprehensive information to help them make the right decisions for their personal circumstances.
As a result, the government will introduce a new guarantee that everyone who retires with a defined contribution pension will be offered free and impartial, face-to-face guidance on their choices, at the point of retirement, with effect from April 2015, and is making £20 million available over the next two years to develop this initiative.
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