Pension Rule Changes for 2015
The Pension rules are set to change dramatically in April 2015 if the proposals put forward in the March 2014 budget come into effect.
You will have the freedom to choose when and how to use your pension assets to generate an income from 6th April 2015. You will no longer have to buy an annuity. Your Pension will effectively become an open pot of money for you to access whenever you want to, with the caveat that you will still need to pay income tax on money drawn from your Pension.
In the meantime, temporary measures now apply for those looking to access their Pensions.
Those already in capped drawdown can move to what is now flexible drawdown from April 2015, but could move now if you have a Pension income of more than £12,000 per annum (reduced from the previous £20,000 needed to qualify for flexible drawdown).
If you are unsure of your options please do call us on 01604 211234 or e-mail email@example.com.
Pension Contribution Rules for 2014/15
For this current (2014/15) tax year the maximum pension contribution limit has been reduced to £40,000 per annum (down from £50,000 in 2013/14). However you still benefit from tax relief at your highest income tax rate. That is, a basic rate taxpayer will receive 20% tax relief, a higher rate tax payer 40% and an additional rate tax payer 45% relief. You can also still use up any unused allowance from the previous three tax years if you did not use it all up at the time.
The lifetime allowance has also now been reduced. The full lifetime allowance from 6th April 2014 is £1.25m, down from £1.5m. Although this sounds like a large pension pot to many, people with defined benefit (final salary) pension schemes could get caught out by this.
Pension & Retirement Planning Reality Check
You could spend up to 40 years or more in retirement. How are you going to fund this?
To buy an income of £30,000 a year in retirement you would need a pension worth £600,000 assuming a 5% return each year. There is no getting away from that or thinking it’s too big a number to think about. One day you will wish you had thought about it earlier. Now is your chance.
Some More Pension Rules & Details
Once a contribution to a pension has been made the money cannot be accessed until you are 55 years of age. This is now the minimum retirement age for accessing your personal pension.
If you are under the age of 75 and a UK resident you should be eligible to contribute in to a pension.
Annual contributions to a personal pension are limited to 100% of gross UK earnings, subject to a maximum of £40,000 in 2014/15.
The previous £50,000 annual pension contribution limit will apply to each of the last three tax years and can be used to make up any allowance not utilised previously in those tax years.
Any income or capital gains made within a pension plan are free of income tax and capital gains tax.
There is no limit to the number of pension plans you can contribute to so long as the overall maximum amounts are kept to.
To credit your pension with a gross contribution of £1,000 you only need to pay in £800 as the HM Revenue & Customs will provide an income tax rebate of £200 and pay this directly in to your pension to make it up to £1,000.
Higher rate taxpayers can claim a further 20% rebate via their tax return, so £1,000 in your pension fund will only cost you £600 of your own money. Additional rate taxpayers can claim 30% relief in addition to the 20% credited at source.
Those that have no income can still contribute a maximum of £3,600 gross per annum – that is you put in £2,880 and the Revenue will put in £720.
Assets built up within a pension will pass to your beneficiaries on death, as long as you have completed an ‘expression of wishes’ form, and will be free of any inheritance tax.
When you retire you can normally take up to 25% of the value of your personal pension fund as a tax free lump sum.
In fact the current pension rules allow you to withdraw 25% of the value of your pension as a tax free cash lump sum, without needing to take any income under the new income drawdown rules.
You could take your pension and still continue to work if you wish. This may be a valuable option for those looking to work a reduced number of hours each week towards retirement. However this will of course depend on your employer.
The remainder of your pension fund can then be used to purchase an annuity, or to withdraw income from the invested pension fund via drawdown.
An annuity will provide a guaranteed income for the rest of your life. The amount of income the provider offers you will depend on the value of your fund, the options you take with the annuity and your personal details such as gender and age.
Triviality – if your total Pension assets are worth less than £30,000 in total then you may take these as a lump sum without the need to draw them as an income or buy an annuity for example.
Small pots – if you have up to three Pensions worth less than £10,000 each then you may take these now as a lump sum.
Types of Pension
There are two main types of pension – a personal pension and a company (or occupational) pension.
The two types of occupational pension scheme are a final salary (defined benefit) and a money purchase (defined contribution).
Money purchase schemes are similar to a personal pension in that a retirement fund is built up over the years based on your own contributions, and used to purchase an annuity on retirement.
Final salary schemes encourage the employee to build up a number of years in service and use that to determine the level of benefit they will receive on retirement as a proportion of their final salary leading up to retirement.
Personal and stakeholder pensions are a product you can take out yourself to take ownership of the income you can look forward to in retirement. A fund is built up depending on the amount you contribute and the length of time those contributions are made for. The way in which the fund is invested can also have a significant impact on the end value at retirement.
Self invested personal pensions (SIPPs) have become more popular to the masses but remain a type of personal pension primarily for people that have more complicated investment requirements and potentially larger investment pots. However, more often than not the additional costs of a SIPP a rarely justified.
It’s a specialist type of personal pension that allows you to invest in a far broader range of investments that are not permitted in normal personal pensions such as futures, options, REITs (real-estate investment trusts) and unquoted shares.
Tax levels, bases or reliefs referred to are subject to change. The tax treatment of investments will depend on the individual circumstances of the investor.