The government has today published the Taxation of Pensions Bill, which will change the tax rules to allow individuals aged 55 and above to access their defined contribution pension as they wish from April next year. As part of the bill the government is proposing to change the rules on taking pensions as a lump sum to allow people to take a series of lump sums instead of just one.
Currently, people who want to take their pension as a lump sum would take 25% of their pot tax free and then place the other 75% in a drawdown account. Any money they take out of their drawdown account will be taxed at their marginal rate.
Under the new tax rules, individuals will have the flexibility of taking a series of lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at their marginal rate, without having to enter into a drawdown policy.
Chancellor of the Exchequer George Osborne said:
People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long term economic plan. From next year they’ll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax free.
For some people an annuity will be the right choice whereas others might want to take their whole tax free lump sum and convert the rest to drawdown. We’ve extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum.
At Budget 2014 the government announced a fundamental change to how people can access their pension. From April 2015, around 320,000 individuals retiring each year with defined contribution pension savings will be able to access them as they wish, subject to their marginal rate of tax.
Last month the Chancellor announced that from April 2015 individuals will have the freedom to pass on their unused defined contribution pension to any nominated beneficiary when they die, rather than paying the 55% tax charge which currently applies to pensions passed on at death.
Photo courtesy of Winfried on Flickr, used under Creative Commons.