Pension flexibility on the horizon

imageThe Budget proposed some major changes to the ways in which people can access their pension benefits.

Under the pre-Budget 2014 rules for drawing retirement benefits, from age 55:

  • You could draw up to 25% of the fund free of tax as a lump sum.
  • The balance had to be used to provide an income under a variety of options, of which the main ones were:
    Buy an annuity Annuities normally guarantee an income throughout life.

    Choose capped drawdown This allowed withdrawals directly from the pension fund, but they were subject to maximum amounts that were subject to regular review.

    Select flexible drawdown This was effectively drawdown without any annual limits or compulsory reviews, but it was only available to individuals with at least £20,000 a year of secure (state or occupational scheme or pension annuity) pension income.

Finance Bill 2014: The interim changes
The pension changes are being introduced in two main steps. There are various interim provisions pending the planned changes from April 2015:

Capped drawdown The limit for capped drawdown increased from 120% to 150% of the broadly equivalent market annuity rate for drawdown years starting on or after 27 March 2014. So, for example, if you are 65, the maximum capped drawdown as at May 2014 would be 8.85% of the fund.

Flexible drawdown From 27 March 2014 the minimum secure income you need in order to take flexible drawdown was reduced from £20,000 to £12,000.

Future legislation and consultation
The later changes will take a little longer to introduce and are currently subject to consultation.

Pension flexibility 
From 6 April 2015 capped drawdown will disappear and effectively flexible drawdown – with no minimum income requirement – will become available to everyone. Annuity sales are expected to plummet as a result.

Death benefits
The tax position on death under the current rules is that any money remaining in a pension fund that is being used for drawdown is subject to a flat tax charge of 55%. The same tax rate also applies to any fund that is not in drawdown if the death occurs from age 75 onwards.

The Budget statement said that “…the government believes that a flat 55% charge will be too high in many cases in the future” and promised to “engage with stakeholders” in reviewing the rule.