As part of the Government’s recent Budget announcements, Chancellor George Osborne confirmed the sweeping reforms called “Pensions Wise” which from 6 April 2015 will transform how people can take their pension savings at retirement from money purchase pension schemes.
From this date there will be no overriding requirement for the member to hand over his or her pensions pot to an insurance company, in order for the insurer to provide an income for life – called an “annuity”. Annuity rates have been seen as providing poor value in recent years due to high gilt yields and a rise in mortality rates.
Before these changes, the retirement options for the majority of people have been limited to taking 25% of their pension pot as a tax free lump sum, with the requirement to exchange the balance for an annuity. Following the changes, members will be able to drawdown a pension without touching the capital, and may withdraw all their pot as a cash lump sum.
Cash withdrawals over 25% will not be tax free, and will attract a tax charge based on the member’s marginal rate of income tax. The flexibility is to be extended to current pensioners from April 2016, when they will be able to cash in their annuities. Members of trust based schemes may not be able to access these freedoms and may think of transferring their benefits to other schemes for this purpose.
The Government’s aim is that people should plan carefully for their retirement and not blow their pots leaving them dependent on the state pension. People will need to seek independent advice to help them properly understand their retirement options and the tax pitfalls. In difficult times, some may raid their pension pots to help them with other financial commitments, like school fees or paying off debt. Of course, should they do that, the Government stands to benefit as more tax is collected.