Major reforms have been proposed in the Budget to the tax regime for defined contribution pensions to introduce much greater flexibility on how accumulated savings can be used. No changes were announced to the annual and lifetime limits (which reduce in April).
- From 27 March 2014 the amount of guaranteed pensions income an individual needs to get flexible access to their savings will be cut from £20k to £12k. The capped drawdown limit is to be increased from 120% to 150% to ensure more flexibility to those who would otherwise buy an annuity.
- The amount of cash that can be taken from small pension pots will be substantially increased.
- From 2015, subject to consultation, it is proposed that individuals will be able to withdraw from their pension funds at any time with the excess over the tax free lump sum being taxed as normal income (rather than at the 55% rate). The 55% exit charge currently operates as a powerful incentive to buy an annuity and the government may have concluded that limiting the de facto requirement to buy an annuity is a “crowd pleaser” in an election year!
We have argued in our Pensions White Paper for greater flexibility in how retirement savers can access their funds and welcome this consultation. It marks an important step towards a more holistic approach to retirement planning but the impact on DC and DB providers and the public sector remains to be seen. However, it is clear that the default funds for DC pensions will need a radical redesign.
In parallel to these changes, the ISA rules are being overhauled with an increased annual savings limit of £15k for the 2014-15 tax year all of which can be held in cash. Investors will also be able to switch to and from cash and shares within their “new” ISA, making them more attractive as a retirement savings tool. In addition, National Savings will be launching a new product in January 2015 for the over 65s, allowing individuals to invest up to £10k in a savings bond which will carry an attractive return (the Chancellor suggested a rate of 2.8% for a one year bond).