The devil is in the detail of any Budget, but it normally doesn’t take five months to be confirmed.
After announcing the new ‘Pension Flexibility’ way back in March, the Government has finally revealed the final rules, including a new way of accessing your pension pot when you retire.
So what’s changing? How will it affect you? Read on for all the answers.
A new way to access your pension
In our experience most people take the maximum tax-free lump sum, 25% of the value of the pension pot, when they retire. The rest is then generally turned into an income using an Annuity or Income Drawdown. Currently, unless you can prove a guaranteed annual income of £12,000, the maximum income available each year is capped, either at the level offered by the Annuity provider, or by the GAD limit in the case of Income Drawdown.
However, as a result of the Budget changes, everyone over the age of 55 will have unprecedented access to their pension, with no limit on the lump sums or income which can be taken.
Pensioners will have a range of options, including:
Flexi Access Drawdown – New! This option will replace the two current versions of Income Drawdown, known as Capped and Flexible Drawdown.
Flexi Access Drawdown will allow any combination of lump sums or income to be taken, with any funds not withdrawn remaining invested. In fact, it will look very much like the Flexible Drawdown we currently have.
This option will also effectively replace the old ‘triviality’ and ‘small pots’ rules, which were only available from 60; UFPLS will be available from 55.
Annuity This will still be a popular option for many, especially those who want a guaranteed income for the rest of their lives and a relatively simple solution.
However, many of the old rules will be swept aside, giving Annuity providers far more flexibility. An Annuity will still have to offer a guaranteed income for life, but It will be possible for providers to offer Annuities with guarantee periods of longer than 10 years, as well as products where the income can rise and fall in line with your requirements.
Expect to see a lot of innovation from Annuity providers over the coming months.
Ad hoc lump sums – New! In a surprise move an entirely new option has been introduced, with the catchy name of Uncrystalised Funds Pension Lump Sum or UFPLS for short!
This will allow anyone over the age of 55 to simply withdraw a lump sum from their existing pension, without the need to move into Income Drawdown or the new Flexi Access Drawdown.
25% of the lump sum will be tax-free, the rest will be added to your income and taxed at 0%, 20%, 40% or even 45%, depending on how much you earn elsewhere. If this option is taken the rest of the pension pot will remain ‘uncrystalised’; therefore no tax will be paid on the lump sum paid out should you die before the age of 75.
Future pension contributions
Many people will find the new flexibility attractive, perhaps taking a lump sum from their pension pot whilst they continue to work.
It’s important that anyone doing this can continue to make pension contributions; perhaps to make up a shortfall after taking a lump sum, or because they have been automatically enrolled into a workplace pension.
However, the Government is concerned that people will abuse the system, by recycling money, especially the tax-free lump sum, to pick up tax-relief. As the table below shows, they have therefore placed restrictions on the level of contributions which can be made after taking money from your pension pot.
Option chosen 100% of the GAD rate
Before retirement, known as the Annual Allowance £40,000
Flexi Access Drawdown is used £10,000 if income is taken
£40,000 if just the lump sum and no income is taken
Annuity, excluding short-term Annuities £40,000
Flexible Drawdown (for people who have chosen this option before 6th April 2015) £10,000 (this is a change to the current rules, which stop people in Flexible Drawdown from making pension contributions
Capped Drawdown (for people who have chosen this option before 6th April 2015 and do not move into Flexi Access Drawdown) £40,000
What about existing Income Drawdown investors?
Capped Drawdown, as Income Drawdown is more correctly known, will no longer be an option for new retirees after 5th April 2015.
However, if you are already in Capped Drawdown you will be able to continue with the arrangement. The income will remain capped at 150% of the GAD rate and you will still have an Annual Allowance of £40,000.
If you want access to a higher income than is available under Capped Drawdown, or you want a lump sum, you will need to move to Flexi Access Drawdown. However, this will mean any future pension contributions will be limited to £10,000.
People in Flexible Drawdown will see very little change. Although they will be allowed to pay up to £10,000 each year into a pension; something which they can’t currently do.
Confused? We’re here to help
The new rules are complex and will certainly take some getting used to.
If you are approaching retirement, or you are already using Income Drawdown and would like to know how to take advantage of the new rules, we’re here to help.
Our team of retirement experts can talk you through the changes and recommend the right course of action for your specific circumstances.