PENSION REFORMS – It’s All Changing
As many of you may already know the Government have recently proposed the biggest changes surrounding pensions that have been seen for many decades. These changes aim to provide people with the freedom and flexibility to choose how they access their pensions from April 2015.
Previously, the Government attempted to steer most people to purchase annuities (income for life contracts) with their retirement pots however, historically annuities often provide a low annual income and the pension pot is potentially lost after an individual dies. Therefore, the changes supply people with more choice with the money they have worked hard to save.
Prior to the Transition Rules the pension pot options were:
The Government in March 2014 announced some transitional rules until the new pension rules are launched in April 2015, which allowed the following:
- Trivia Commutation increased to £30k from age 55.
- Capped drawdown increased to 150% of GAD
- Flexible drawdown only required a secure income of £12,000.
- Small pension pot increased from £2k to £10k
With these changes, the Government is determined to offer individuals more flexibility in regards to how they take their pension. Irrelevant of the size of your pension pot, individuals aged 55 or over in April 2015, will have absolute freedom in regards to how much they can draw out of their pension, and when they choose. There are no limits or restrictions set by the Government and individuals will only pay their marginal rate of income tax, whilst still benefiting from taking up to 25% of your pension pot tax free.
INHERITANCE TAX SAVINGS (IHT)
These changes will generate several benefits including Inheritance Tax. Previously, once you started taking money from a pension pot it became part of your estate, consequently beneficiaries could end up paying 40% IHT tax. Now, if an individual dies before reaching age 75, their pension pot can be passed on completely tax free and therefore, does not fall into your estate.
TAX CONSIDERATIONS – it’s not all free
However, there are tax implications that need to be considered. If you take out your pension pot as a lump sum, or empty your pension pot in the first few years, although you will receive 25% tax free, you will have to pay a marginal rate of income tax on it depending on the amount, either 0%, 20%, 40% or 45% which could amount to more tax paid than if you gradually paid yourself an income over 20 years.
Therefore, it is essential that you obtain professional advice from a financial adviser to establish the most appropriate method of obtaining your retirement income; as it will help you to take an income that doesn’t drain your pension pot whilst also determining the best route to take in regards to tax planning.
Although the flexibility and freedom these changes are bringing to pensions can benefit you, it is also important to be aware that if you spend all your pension pot too quickly and find that you are then living off the state pension, you may have to contemplate going back to work. Therefore, it is necessary to plan ahead with your retirement income as with life expectancy rising, you may find that you are working or going back to work for much longer than anticipated.
STATE PENSIONS – A Flat rate Credit
Seeking help from a financial adviser is crucial with helping with your financial planning. If you have reached your state pension age and are still currently working or are not in desperate need of it, you could benefit in the long term from deferring it.
Currently, if you were to defer your state pension for just one year, your pension would increase by 10%, and after this year, you could request that any deferred pension is given as a lump sum. Therefore, if you are in good health or want to continue working for a little longer, you would benefit considerably from deferring your state pension. However, with the new flat-rate state pension being introduced in 2016, deferring your state pension will only increase by 5.8%. In order to qualify for this new flat-rate state pension, you must have contributed 35 years’ worth of National Insurance contributions, which would provide you with £152 per week.
According to Government figures, only 45% of new pensioners will be entitled to the new flat-rate state pension. Therefore, it seems the majority might benefit greatly from deferring their state pension.
To find out more or to speak to a financial adviser call Heritage Financial Solutions Ltd on 01352 770 845, or email us at email@example.com.