After the Budget, we explained the new pension legislation that the Chancellor hopes to introduce in April 2015. You can review our key guide here. The Government has released an update after a consultation period.
What we knew already
We expect the following to apply from April 2015:
- You will have unrestricted access to pension funds from age 55. The first 25% will be tax free and the remaining 75% will be taxed at your marginal rate
- Upper income limits will be removed from existing drawdown pensions from April 2015
- Minimum pension age will increase from 55 to 57 in 2028 (with the exception of some occupations)
Due to their simplicity and security, we continue to believe that annuities will still remain suitable for many clients.
Reduced annual allowance for people who have taken benefits
The update explains how the Government plans to prevent the new rules being abused for tax-avoidance. In simple terms, once you take more than 25% of your pension fund tax-free, your annual allowance will reduce from £40,000 to £10,000. If you continue to earn pensionable income, this means that you will only be able to claim tax relief on gross pension contributions of up to £10,000. To be clear, this only applies once you take taxable withdrawals from your plan. If you do not take taxable withdrawals, your annual allowance of £40,000 will not be affected.
This is actually more generous than we expected. Furthermore, the new rules will be beneficial for clients who have taken advantage of flexible drawdown terms and do not currently have an annual allowance. From April 2015, their annual allowance will be £10,000.
As always, there are a couple of exceptions to the reduced annual allowance rule. You will retain your £40,000 annual allowance in the following situations:
- If you invested in an income drawdown plan before April 2015 and your withdrawals stay below the current income limits
- If you take benefits from a plan that is worth less than £10,000
Final salary pension transfers
The update confirms that the Government does not intend to ban transfers out of private sector final salary pensions or funded public sector schemes, allowing people with these pensions to take advantage of the new rules.
Still to find out
Tax on death
Under current rules, when someone dies while in drawdown, the fund value can be paid out as a lump sum taxed at 55%. The update confirmed that the Chancellor feels that this is too high and hopes to announce a lower tax rate in his Autumn Statement. We will keep you informed.
As ever, if you have any questions about this information and how it affects you, please contact us.