In comedy, timing, it is said, is everything.
There was nothing comic though about the fact that five days after we received printed copies of our latest guide, the Chancellor stood up and delivered his pensions game changing Budget speech!!
The following notes are designed to update and supplement some of the content in our retirement income choices and options guide.
A Guide to the Retirement Choices & Options Maze
Despite the suggestion that “people will no longer have to buy an annuity with their pension fund” (as if this was something new), in fact this has been the case for very many years it is just that the myth that pension plan holders have to buy an annuity has stood the test of time.
Income drawdown is the one area where there has been a good deal of proposed change though and this is the area of our guide that requires some amendment.
Income Drawdown changes (effective 27th March 2014)
Capped Drawdown
For income drawdown the maximum income (GAD rate) will now be set at 150% rather than the current 120%.
It is of course still possible to take as little as 0% of the GAD rate so for those who want to take the tax free cash lump sum and no income that is still absolutely possible.
We would suggest though that if the maximum tax free cash is not required, phasing of benefits is still very well worth considering.
Flexible Drawdown
For those people who have a guaranteed income from State pensions, defined pensions from an occupational pension scheme or annuity income of £20,000 per year gross, any amount can be drawn from their pension plan fund.
This £20,000 will now be reduced to £12,000 gross income per year. Remember that this income is subject to income tax at the highest marginal rate paid by the plan holder.
Trivial Commutation
Those with pension “pots” of up to £30,000 may draw them as a lump sum. The first 25% is tax free the balance is subject to income tax at the marginal rate of income tax payable.
There was previously a rule that if you had up to two really small pension ”pots” of under £2,000 you could take them both as a lump sum. This is now being expanded to up to three “pots” of £10,000 each.
Changes effective 6th April 2015
Here things change quite radically.
Pension plan holders can, if they wish, take the whole of their pension fund as a lump sum. The first 25% is tax free. The balance, the other 75% can be paid as a lump sum but is subject to income tax at the highest marginal rate.
So if you had a pension fund of £40,000 you could receive a tax free cash lump sum of £10,000 and a further lump sum of £30,000 which would be taxable.
You might then pay 20% or 40% or 45% income tax on that part of your benefits. Or a combination of these rates hence the “marginal” description.
The pension plan holder will be able to do whatever they want with their pension fund.
The general consensus is that most people having prudently saved for retirement will also be prudent with this capital. There will of course be others who are less prudent!
In our view impartial, independent and professional advice has just become an even more valuable commodity.
