New rules about pensions from March 2014Posted by Olderiswiser Editorial
Read our Money Advice Service guide to pension rule changes that could affect you retirement income.
Under government proposals due to come into effect from April 2015, you’ll be able to access and use your pension pot in any way you wish after the age of 55. Until then, the rules about how much income you can access as a cash lump sum or through income withdrawal have been relaxed.
Taking your pension from April 2015
From April 2015, you’ll be able to access and use your pension pot in any way you wish after the age of 55.
You will be able to:
- take up to a quarter (25%) of your pension pot tax free
- convert some or all of the rest into a regular retirement income (known as an annuity), and/or
- withdraw the remaining cash in stages or as one lump sum, subject to tax at your highest rate
From April 2015 you’ll be offered free and impartial face-to-face guidance on your options.
Why the changes?
Most people have used their pension pots to buy an annuity to provide a regular retirement income – and this option will still be available. The changes are being introduced to offer you complete choice and flexibility about how you use your pension pot to fund your retirement income. They will also encourage more people to save for retirement.
Pension changes between now and April 2015
From 27 March 2014, the value of pension pots that you can take as a lump sum has increased.
The rules about how much of your pension pot you can take in stages (known as ‘income drawdown’), have also been relaxed.
Here is a summary of the interim rules that will apply until April 2015. After that, they will be replaced new rules offering complete flexibility.
Pension pots of £30,000 or less – interim rules
If you are aged 60 or over and your total pensions savings (excluding State Pension entitlement) amount to £30,000 or less, you can now take the entire amount as a cash lump sum. This is called ‘trivial commutation’.
Alternatively, if you have small pension pots of £10,000 or less you can take up to three of these as a cash lump sum. You can do this even if your total pension savings exceed £30,000.
Either way, you are entitled to receive a quarter (25%) of each pot’s value tax-free. You then pay tax at your highest tax rate on the rest.
If you have one pension pot worth £28,000 and you take it as a cash lump sum, £7,000 will be tax-free, but you’ll have to pay Income Tax on the remaining £21,000.
If you have three pension pots of £3,000, £5,000 and £8,000, you are entitled to take a quarter of each amount tax-free. The combined value of these pots is £16,000, so you would get £4,000 tax-free and pay Income Tax on the remaining £12,000.
How taking a cash lump sum affects retirement income
If you decide to take all your pension pots as cash, then you lose the option of converting them into a regular retirement income – for example, by buying an annuity.
Cashing in your pensions pots may also affect how much you’re entitled to in state benefits when retired. For example, if you boost your savings by taking your whole pension as a lump sum this may reduce your entitlement to Pension Credit.
Depending on your current income and the size of the lump sum, it may also affect how much Income Tax you pay if you re-invest it and so increase your overall annual income.
We recommend that you take advice before deciding what to do – see ‘Getting advice’ below.
Income drawdown - interim rules from 27 March 2014
Income drawdown is a type of retirement income product that lets you take an income from your pension pot while leaving the remainder invested. This means that you can continue to benefit from growth in your pension fund.
There are two kinds of income withdrawal: capped drawdown and flexible drawdown. In both cases you pay tax at your usual rate on the income, provided you stick to certain rules. You are taxed at 55% on any income withdrawal that doesn’t meet the rules.
The rules and limits for income drawdown have been relaxed from 27 March 2014. There will be no restrictions under the new proposed rules from April 2015.
The amount you can now take as income is capped at 150% of the value of an equivalent annuity (up from 120%). There is no minimum level of income you must take.
Flexible drawdown rules
Under flexible drawdown, there are no limits on the income you can draw. However, you must be able to show you are already receiving other pension income of at least £12,000 a year (down from £20,000). This minimum income level includes State Pension benefits, salary-related pensions, lifetime annuities and scheme pensions.
How income drawdown affects retirement income
Increasing your income drawdown amount may also affect how much Income Tax you pay. So unless you need the extra income, you may want to limit the increase to keep you in your current tax band. This will become especially relevant from April 2015 when there will be no limit on how much you can take out.
We recommend that you take advice before deciding what to do (see below).
Getting advice close to retirement
Are you planning to retire between now and April 2015 and relying on your pension pot to provide you with a retirement income? Or could you afford to delay taking your pension but aren’t sure what to do?
Make sure that you take advice before deciding what to do. You could start by talking to a free service such as The Pensions Advisory Service on 0845 601 2923 or speak to a financial adviser.
If you can afford to delay taking your pension until April 2015 you will have more choice. And from April 2015 you will also be offered free and impartial guidance on your options when retiring.
Changing or cancelling your current arrangement
If you already have an annuity
If you bought an annuity in the 30 days before 27 March you have the right to cancel under the cooling-off period rules. Some providers, including LV and Partnership, have extended their cooling-off period to 60 days.
We recommend that you get advice before deciding what to do – but don’t delay because once the cooling off period has passed you are locked into the annuity contract for life.
If you bought your annuity at an earlier date then you are tied to that contract and won’t be able to switch out.
If you are already in income drawdown
You can increase you income by asking your provider or financial adviser for an emergency review – but this can only take place on the anniversary date of your last review.
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