Pensions Revolution: the proposals firmed up
The pension revolution began in March 2014 when the Chancellor revealed plans in the Budget to transform pensions.
Since the Budget there has been a consultation period, the conclusions of which have now been published. The key areas are:-
1. Rising Pension Age The age at which savers can access their personal pensions will rise from 55 to 57 in 2028 and then stay 10 years below the official state pension age. Younger workers may not be eligible for a state pension until the age of 70 and will therefore have to wait until age 60 to access their pension.
2. Accessing Capital The Budget proposed changes to increase flexibility and choice when taking pension benefits. From April 2015 the whole personal pension fund can be accessed as cash. The first 25% will be tax free with the balance being taxed as earned income. (Comment: extreme care must be taken when planning how cash is taken as it could seriously worsen your tax position and also reduce future income in retirement).
3. Death Tax Rate Currently the fund inside a pension that has been accessed can be passed to beneficiaries less a 55% tax when the pensioner dies. This applies to drawdown plans. The Government will announce this Autumn a reduction in the 555 rate and this is expected to be 40%.
4. Annuities The various changes have affected the number of people opting for an annuity at retirement. New rules are being created to allow pension firms to provide more flexible annuities and these will be announced in due course.
5. Recycling Loophole The reforms appear to open a tax loophole for the over 55's. A saver could withdraw up to £40,000 and immediately feed it back into a fund to cut taxes. From April 2015 anyone who has accessed their pension money will be limited to contributions of no more than £10,000 per year. This will apply to current drawdown clients, but not those who have bought annuities.