March 27, 2014 is D-Day for pensions as Chancellor George Osborne’s sweeping changes come in to effect – so here’s an explanation of what the really mean for retirement savers.
Until D-Day, many pension savers lacked flexibility and control over how they could manage and spend their savings.
Although the changes start from March 27, 2014, the Chancellor will bring in a new law to start from April 2015 with wider ranging changes that include all pension savers.
Who do the new rules affect?
Anyone with a defined contribution (DC) pension aged 55 or over. Anyone with a defined benefits o final salary pension is excluded from the new rules – which mean most public sector and civil service pensions.
What’s the headline change?
Anyone with a DC pension can take all or part of the fund in cash when they want and to spend on whatever they want from April 2015
Rules from March 27, 2014 until April 2015
Meanwhile, the amount of overall pension wealth a retirement saver can take as a lump sum goes up from £18,000 to £30,000
The maximum capped drawdown amount goes up to 150% of the value of an annuity the pension fund could buy. To take money under capped drawdown, the saver does not have to show any additional income
For flexible drawdown, pension holders only have to prove they earn £12,000 a year instead of £20,000 but can take as much money out of their fund as they want
Small pot pensions of up to £10,000 can be drawn as a lump sum, even if the retirement saver has other pensions worth more
For savers with more than one small pot pension, the number that can be withdrawn as a lump sum is increased from two to three
What about tax?
The Chancellor will let retirement savers have 25% of their fund tax-free. After that, tax is payable on the money at the pension saver’s marginal rate – that’s the highest rate of tax they pay.
So, a basic rate taxpayer drawing £1,000 after taking the tax-free lump sum pays 20% or £200 income tax, while a higher rate taxpayer would pay £400 at 40% under the same circumstances
The Treasury reckons 400,000 people can draw their funds and reinvest or spend them instead of buying an annuity between March 27, 2014 and April 2015 – and from then on around 300,000 savers a year will benefit
Prime Minister David Cameron has hinted that anyone who draws down their pension cash and then applies for benefits to help fund long-term care should know that any drawdown will be included in their assets if the benefit is means-tested.