2014 Budget Update

In his Budget the Chancellor, George Osborne, announced wide sweeping changes to the UK non-state pension system from April 2015.
(On the 21st July 2014 the results of a consultation were announced that further amended the Budget proposals. The sections below have been updated with these latest changes.)

Main Points Summary

If you are aged 55 or more you will be able to take all of your Defined Contribution (DC) pension benefits as a cash sum.
If you have an unfunded Public Service Defined Benefit pension (often called a Final Salary pension) you will not be able to transfer to a DC scheme to take advantage of the new flexibility. The Local Government Pension Scheme (LGPS) is the only one not affected.
Transfers from Private Sector Final Salary Schemes to DC schemes are unaffected but individuals wishing to transfer will have to prove they have consulted a professional financial advisor authorised by the Financial Conduct Authority (FCA).
From 27th March 2014 certain pension scheme benefits that were taxed at 55% will now be taxed at your income tax rate.

From 6th April 2015

(subject to the legislation being passed by the government)

If you are aged 55 or more and have a Defined Contribution Pension (sometimes called Money Purchase or Personal Pension) you will be able to take ALL the built up pension pot as cash, subject to the pension scheme rules. 25% will still be tax free but the balance will be added to your income for that tax year and taxed accordingly.Defined Contribution schemes are those where individual contributions (and employers contributions, where applicable) are invested and produce a pot of money at retirement. Such arrangements include Personal Pensions, Stakeholder Pensions, Group Personal Pensions and Occupational Money Purchase schemes.
The other major change is that if you have an unfunded Public Sector Defined Benefit (sometimes called Final Salary or Career Average) pension you will not be able to access it all as cash AND you will not be able to transfer your benefits out to a Defined Contribution scheme to take advantage of the increased flexibility, mentioned in 1 above, as you currently can do.These Public Sector pension schemes include the Teachers, NHS, Civil Service, Police, Fire Fighters and Armed Forces. This means that you will have to accept the benefits as provided by the scheme. The Local Government Pension Scheme (LGPS) is not affected as it is a funded scheme. There is an exception to the above and that is where all your pension pots, excluding the State Pension, total less than £30,000 then you will be able to take all as a cash sum in the same way as 1 above.
If you have a Private Sector Defined Benefit (sometimes known as Final Salary or Career Average) pension then you will still be able to transfer to take advantage of the increased flexibility offered by Defined Contribution schemes.
The government also intends to introduce a permissive statutory override, which will allow schemes to ignore their scheme rules and follow the tax rules instead, in order to pay out payments flexibly or even to provide a drawdown facility.
Every individual with a defined contribution pension will have the right to free and impartial guidance on their options as they approach retirement (known as the guidance guarantee). A number of organisations will be appointed to provide this guidance service including the Pension Advisory Service (TPAS) and the Money Advice Service (MAS).
There will be a new requirement for an individual, who wants to transfer away from a defined benefit scheme, to take advice from a professional financial advisor, who is independent from the scheme and authorised by the FCA, before the transfer request can be accepted.
A new rule will be introduced so that those people who drawdown more than their tax free cash sum from a Defined Contribution scheme, where the value of the pot is greater than £10,000, will have an annual allowance to make further tax relievable contributions to a Defined Contribution scheme of up to £10,000. If the value of the pot is less than £10,000 then this maximum allowance will not apply.For people who already have an existing capped drawdown plan (one where there is currently a maximum limit on how much you can drawdown each year) the £10,000 maximum annual allowance will not apply until such time as a withdrawal exceeds the current maximum drawdown limit applying.
Another change is that the minimum age at which pension benefits can be taken will increase from age 55 to age 57 in 2028 and then it will be linked to 10 years before State Pension age after that.

From 27th March to 5th April 2015

In the meantime the existing rules stand with some changes to limits as follows:

If you are aged 60 or more and if the value of all your pension pots is less than £30,000, excluding the State Pension, then you can take all of it as a cash lump sum rather than having a very small pension income for life. 25% will still be tax free but the balance will be added to your income for that tax year and taxed accordingly. This is known as Trivial Commutation.
Again if you are aged 60 or more, in addition to the above, and have a pension pot of less than £10,000 then this can be taken all as cash as above. You can have up to 3 of the small pots. This is also known as (small pot) Trivial Commutation.
In a normal capped drawdown contract the maximum withdrawal limit has been increased from 120% to 150% of an equivalent annuity, as laid down by the Government Actuaries Department (GAD).
There was a requirement for certain people that if they already currently had guaranteed retirement income being paid of £20,000 per annum then they could take all their pension pot in cash via what is known as Flexible Drawdown. The income limit has been reduced to £12,000 pa.
The tax rate on funds taken as cash was 55% in some cases and this has now been reduced so that the sum is added to income for that tax year and taxed accordingly.

Points to bear in mind

This Budget gives everyone, with some exceptions, much greater flexibility, but also brings with it complications regarding taxation in the form of Income Tax, Inheritance Tax and also any means tested state benefits being received, depending upon the choices made.

Please remember that future rates of tax can change and actual tax treatment will depend upon your individual circumstances at the time.

Also, taking into account that from 2016 the state pension is moving to a flat rate, you will need to ensure that you have enough income to provide the lifestyle that you require during retirement. So, if you take 100% of your pension as cash you will not have any retirement income from that pension source.

All these choices and options can seem complicated and confusing so it’s important to make sure you make the right decisions. Ten will be able to help you on which option or options best suit your needs and circumstances whilst pointing out both the disadvantages and risks along with the advantages and benefits.