Today (Thursday 27 March 2014) marks the first step in the government’s fundamental reforms to British pensions unveiled in last week’s Budget.
From today, over 400,000 people who have worked hard and saved hard all their lives, and done the right thing, will be able to access their retirement savings more flexibly.
The government will also confirm today that people who have recently taken a tax-free lump sum from their defined contribution pension will be given more time to decide what they wish to do with the rest of their retirement savings and will not be put at a disadvantage should they wish to wait to access their pension savings more flexibly.
The Budget set out radical plans to completely change the tax treatment of defined contribution pensions to bring it into line with the modern world. From April 2015, we will make it possible for people to withdraw their defined contribution pensions savings however they wish, subject to income tax.
But to make sure those retiring before this date don’t miss out, some changes will take effect from today. These changes will give thousands of people flexibility for the first time and around 85,000 people much greater freedom to drawdown their pension. The government is:
- cutting the minimum income requirement to access pension savings flexibly (flexible drawdown) from £20,000 to £12,000, with around more than 56,000 people now able to drawdown their pension as they wish, subject to their marginal rate of income tax
- raising the capped drawdown limit from 120% to 150% of an equivalent annuity, which means:
- for someone aged 65 with a pot of £100,000, they would be able to take an additional £1830 from their pot, before tax
- a 65 year old with the median defined contribution pot of £44,600 would be able to take around £820 extra before tax
- an individual contributing 8% of their salary to a pension each year whilst earning an average salary of £25,000 from age 20 to retirement at 65 would have accumulated a pension pot worth around £185,000. Under the new capped drawdown limit they would be able to withdraw an extra £3,390 from their pot this year, which would then be subject to their marginal rate of tax. Or From April 2015, they could take the whole amount, subject to their marginal rate of tax
- almost doubling the size of the total pension savings that can be drawn down entirely and taken as a lump sum to £30,000, without incurring the 55% tax charge. Previously an individual with a £30,000 pot would have had to pay taxes and charges of £21,000 if they wished to take this as a lump sum. Now they will only pay £4,500, leaving them £16,500 extra to invest or spend as they wish
- increasing the size of a small pot that can be taken as a lump sum, regardless of total pension wealth, five-fold to £10,000, benefitting an additional 32,000 people
- increasing the number of small personal pension pots that may be taken as lump sums from two to three. For example an individual with three personal pension pots of £7,000, £8,000 and £9,000 will now be able to take these as a lump sum of £24,000 rather than having to annuitise and receive around £1,300 a year
Over 400,000 people will be able to take advantage of these changes – the 320,000 people retiring this year with defined contribution wealth, plus those already in capped drawdown who can benefit from the increase in the drawdown limit to 150%. The government’s wider reforms will benefit 13 million people in Britain who have defined contribution schemes, and the numbers continue to grow.
The government is also changing the current rules that require people who take up to 25% of their pension pot as a lump sum to “secure an income” within 6 months, which is usually an annuity.
The government intends to include legislation in Finance Bill 2014 to ensure people do not lose their right to a tax-free lump sum if they would rather use the new flexibility this year or next, instead of buying an annuity.
Chancellor George Osborne said:
From today, over 400,000 hardworking people will have new choices about how to invest or spend their hard-earned retirement savings.
The pensions reforms in my Budget have struck a chord with many. The reaction to the Budget reminds us all of a simple truth: when people are given more choice over their own lives they warmly welcome it. These reforms are part of our long term plan to create a more secure economic future for Britain.
The government has already introduced greater flexibility and choice for people in retirement, including by removing the requirement to convert a pension pot into an annuity by age 75 and introducing flexible drawdown. However, most people still have little option but to take out an annuity, even though annuity rates have fallen by a half over the last 15 years.
That’s because if you wished to withdraw your entire pension fund, it would be subject to a 55% tax charge under current rules.